Yesterday (Feb. 26) President Obama released a general outline of his FY 2010 budget (with further details to be released in April). The budget plan covers the next 10 fiscal years. Following are highlights of the budget plan:

• Overview:  The budget includes deficit reduction from reducing war costs; allowing tax cuts for high income earners to expire; closing corporate "loopholes"; undertaking program integrity initiatives; and eliminating non-performing programs. At the same time, the budget proposes to invest heavily in health care, energy, and education initiatives. 

• Halving the Deficit: Overall, the proposed budget would cut projected deficits in half over the next four years from more than a trillion dollars at the start of the Administration to $533 billion by FY 2013.  At that level, the deficit would decline to 3% of GDP.  

• Rosy Scenario? The budget assumes 3.2% growth in real GDP in 2010, compared to the February Blue Chip estimate of 2.1%.

• Tax Proposals: 

• For taxpayers with incomes over $250,000, the Bush tax cuts would be allowed to expire. The top rate would jump from 35% to 39.6%; the tax on capital gains would jump from 15% to 20%, and the tax on estates worth more than $3.5 million would be taxed at the current rate of 45%. Also, the earnings of hedge fund managers would be taxed as normal income, rather than the lower 15% capital gains rate. These tax increases would generate more than $600 billion in deficit reduction over 10 years. 

• For all other taxpayers, the budget would extend the Bush tax cuts--including the 10, 15, 25, and 28 percent brackets, the child tax credit, and marriage penalty relief--at a cost of more than $2 trillion over 10 years. The budget would also make permanent the stimulus bill's annual $800 per family tax cut at a cost of $526 billion over 10 years (paid for by new "cap & trade" revenues -- see below).

• Health Care Reform: The budget proposes to spend at least $634 billion over 10 years on health care reform aimed at making health coverage affordable, disseminating information on effective treatments, investing in prevention and wellness, and improving quality of care. The initiatives would be contingent on securing funding from: (1) placing a 28% cap on the tax deductions that upper-income earners can claim; and (2) making $316 billion in reforms to Medicare and Medicaid.

• Defense Spending:  For the FY 2010 defense budget (excluding war costs), the budget proposes a 4% increase over FY 2009 levels.
  
• Veterans:  The budget proposes to increase VA funding by $25 billion over the next 5 years.  

• Global Warming and Investments in Renewable Energy: The Obama Administration proposes selling carbon emission allowances through auction as part of a "cap-and-trade" system to cut greenhouse gases dramatically by 2050.  Sale of the emission allowances (estimated at $646 billion over 10 years) would be used to pay for $15 billion per year in renewable energy investments and offsetting the cost of making the stimulus bill's middle class tax cuts permanent. 

• Education:  The Budget would make Pell grants (for college) an entitlement and would increase and expand maximum awards, spending $117 billion over 10 years. This would be partially offset by originating all new student loans in the Direct Loan program, thus eliminating bank subsidies.

• TARP/Financial Stabilization:  The budget includes a $250 billion "placeholder" for further efforts to infuse capital into shaky banks. (See article below)

• Federal Employees: The budget would impose a 2% cap on civilian pay raises and a 2.9% cap on military pay raises.

• A Return to Honest Budgeting? 
  
  On the positive side: (1) the budget includes war funding for FY 2010 and beyond (as opposed to recent practices of funding the war in later supplemental bills); (2) the budget no longer assumes drastic reductions in Medicare payments to physicians (that are technically required by a 1997 law but have not been allowed to take effect in recent years); (3) the budget baseline assumes funding for disaster assistance; (4) the budget no longer assumes phony revenues from letting the Alternative Minimum Tax (AMT) extend to middle income Americans (which Congress never permits); (5) the budget includes permanent funding for the R&D tax credit (as opposed to the previous practice of assuming expiration); and (6) the budget proposes to re-enact the PAYGO law that established fiscal discipline in the 1990s (after making the baseline adjustments called for in this budget).

On the negative side: (1) the budget assumes economic growth of 3.2% next year, far higher than the Blue Chip estimates; (2) the budget artificially inflates the baseline by assuming that FY 2008 war funding levels continue indefinitely and then claims major "budget savings" by proposing war funding of only $50 billion for 2011 and thereafter; (3) the budget claims savings from letting the Bush tax cuts for high income earners expire, even though that is current law; and (4) the budget avoids paying for extension of the remaining Bush tax cuts and the AMT fix by "assuming" them as part of the budget baseline. 

The BIG DECISION:  Democrats' big decision will be whether to use the filibuster-proof Budget Reconciliation process to enact the major spending and tax initiatives in the Obama Budget.  Under Reconciliation procedures, the initiatives can pass with 51 votes in the Senate. Without Reconciliation, 60 votes will be required -- a very tough threshold to reach, as demonstrated during consideration of the recent stimulus bill.  The difficulty Democrats will face is the insistence of Budget Chairman Kent Conrad (D-ND) and others in the Senate that Reconciliation's fast-track procedures should be reserved exclusively for deficit reduction provisions.

Link to President's Budget

Link to House Democratic Analysis

Link to House Republican Analysis

Link to Senate Democratic Analysis

Link to Senate Republican Analysis

Concord Coalition Statement on President Obama's Budget

This week, the House passed 245-178 a $410 billion omnibus appropriations bill for the remainder of fiscal year 2009 (HR 1105). The measure now goes to the Senate 

Legislative Text and Joint Explanatory Statement  

Reason for the omnibus bill:  Last fall, Congress completed action on only 3 of the 12 regular FY 2009 appropriations bills. 

The bill passed the House on a close to party-line vote.  House Republicans argued that the measure should have frozen 2009 spending at 2008 levels, rather than providing adjustments for inflation and other increases.

Congressional Quarterly reported that he bill increased spending by about $31 billion, or 8 percent, more than the total funding in the FY 2008 versions of the spending bills.

Senate Democrats will need to find several moderate Republican votes to reach the 60 votes needed to avoid a Republican filibuster of the appropriations measure. Senate Republican Leader Mitch McConnell (R-KY) said his colleagues want to "shrink the overall size of the pie."

The bill will be open to amendments when considered by the Senate next week. Amendments highlighting Republican objections to the President's FY 2010 budget document are likely.

Background -- Last year's FY 2009 appropriations process was one of the worst on record. Only one FY 2009 appropriations bill made it to the House Floor.

There were two reasons for the serious disruption of the regular appropriations process. First, President Bush threatened to veto any appropriations bills that exceeded his requests, and Democrats--as reflected in the Budget Resolution--called for nearly $25 billion more than the President requested. Second, House Republicans attempted to amend appropriations bills with off-shore oil drilling amendments, strongly opposed by many Democrats.

Consequently, in late September, Congress enacted a stopgap measure to keep Federal programs operating. The stopgap measure: 

• included detailed, full-year appropriations measures for the Departments of Defense, Homeland Security, and Veterans Affairs (based upon provisions informally negotiated by House and Senate Appropriators); and

• included stopgap funding through March 6, 2009 for all other departments and agencies of government at FY 2008 levels.

Impending $76 Billion War Supplemental:  The Administration will send to Congress, within the next few weeks, a $76 billion war supplemental for the remainder of FY 2009.  This would bring total war spending for the current fiscal year up to $143 billion.

Last Monday, February 23, the President, Members of Congress, and budget experts from a variety of think tanks and organizations (including Bob Bixby from Concord) participated in a "Fiscal Responsibility Summit."

During his opening remarks at the Summit, the President highlighted the inter-generational responsibilities that are at the heart of the Concord Coalition's mission: "This administration has inherited a $1.3 trillion deficit -- the largest in our nation's history -- and our investments to rescue our economy will add to that deficit in the short term.  We also have long-term challenges -- health care, energy, education and others -- that we can no longer afford to ignore. But...we cannot, and will not, sustain deficits like these without end. Contrary to the prevailing wisdom in Washington these past few years, we cannot simply spend as we please and defer the consequences to the next budget, the next administration, or the next generation....

"So if we confront this crisis without confronting the deficits that helped cause it, we risk sinking into another crisis down the road as our interest payments rise, our obligations come due, confidence in our economy erodes, and our children and our grandchildren are unable to pursue their dreams because they're saddled with our debts....

"We will reinstate the pay-as-you-go rule that we followed during the 1990s..." (emphasis added)

Small breakout sessions followed on health care, taxes, social security, government procurement, and the budget process.  

During the wrap-up session, House Budget Committee Chairman John Spratt (D-SC) indicated that there was general agreement in the budget process breakout that entitlement reform would require some type of special commission or task force and some certainty that a vote would occur on the group's recommendations. (The Concord Coalition agrees with this point and believes that the budget reconciliation process, which allows for germane amendments but precludes Senate filibuster, is a good model.)