Introduction to the President's Budget – Deficits, Debt, Spending and Revenues
With the much-anticipated release of the FY 2012 President's budget, The Bottom Line will offer detailed analysis of every aspect of the budget in a blog series over the next few days. Our first blog (this one!) will introduce the broad framework.
Under the President's budget -- once the economy recovers -- outlays and revenues are both on a permanent upward path. At first, spending will fall from 25.3 percent of GDP in FY2011 to a low of 22.3 percent GDP in 2015, before rising again to 23.1 percent GDP by 2021. Revenues, meanwhile, are projected to rise quickly from their FY2011 low of 14.4 percent of GDP as the economy recovers, the upper-income tax cuts are allowed to expire, and the President's policies are implemented. Under the President's budget, revenue would rise to 16.6 of GDP in 2012, 19.1 percent in 2015, and 20 percent by 2021. Both spending and revenues would be about 2 percent of GDP above historical averages, by 2021.
Despite substantial revenues -- by historical standards -- deficits persist under the President's Budget, though they come down to about 3 percent of GDP in the latter half of the ten-year window. Projected deficits would be substantially below the Administrations adjusted baseline -- by 1 to 1.5 percent of GDP in any given year. But they would be about 1 percent of GDP higher than under current law (the BEA baseline), and they are well above the levels proposed by the Fiscal Commission in order to begin reducing the debt as a share of the economy.
Which brings us to the debt, which President Obama's budget is projected to stabilize at around 77 percent GDP during the ten-year window. While this is certainly an improvement over current policy (or their adjusted baseline), and we appreciated any effort to stabilize the debt, this level is too high to give us the fiscal cushioning we need. Further, his debt as a percentage of GDP is lower than other similar baselines that include various current policies. Again, the President's Fiscal Commission reduced the debt to 65 percent of GDP by 2020, and further reduced it thereafter. Under this budget, unfortunately, the debt would rise.
So that's the basics of the President's Budget. Revenues and spending which are on the rise but get close enough to stabilize the debt --- though only at high levels. Of course, all this assumes the economic assumptions hold, and Congress identifies a significant amount of offsets which the Administration has assumed without offering specifics.
Our view: this budget is missing any significant reforms to federal health care spending, Social Security, defense, or the tax code. With the Fiscal Commission showing a way forward in all of these areas (and various other proposals), the White House would be wise to follow. Otherwise, it will be impossible to bring spending under control or to bring down the debt to a sustainable level.