April 19, 2014

President's Budget Needs What State of the Union Lacked: Stronger Focus on Fiscal Challenges

For those interested in a vision of fiscal sustainability, the State of the Union Address was a major disappointment.

President Obama noted that the deficit has been cut in half, which is a positive development, but he offered no strategy for making further progress. At $680 billion and 4.1 percent of the economy, last year’s deficit was still quite high. More troubling is that fiscal policy remains on an unsustainable path -- a projection that deserved at least some passing mention.Obama briefly acknowledged that more could be done to bring down the deficit “in a balanced way,” but the general sense was that it was time to move on.

Few would dispute that creating new jobs is a top priority, but that task is compatible with a continued focus on fiscal sustainability. Indeed, a properly phased-in fiscal sustainability plan would improve the economic outlook. Moreover, the budget agreement hailed by the President did little to address either.  

When the President did mention fiscal issues in his speech it was mostly to promote new spending or tax cuts with no cautionary reminder that even a “pay-as-you-go” standard will not be enough to correct the underlying structural deficit that already exists.

To be sure, the President’s tone fit the prevailing mood on Capitol Hill. With the deficit coming down and elections coming up, why worry about a thorny issue like the budget?

Many Democrats seem relieved that the President downplayed the deficit and, as a whole, Republicans seem no more interested in serious budget negotiations this year than he does.

As summed up by House Speaker John Boehner (R-OH), “[Democrats] won’t talk about long-term spending problems unless Republicans are willing to raise taxes. Republicans are not going to raise taxes. And so we find ourselves in a fairly difficult box when it comes with dealing with our long-term spending problems.”

True, nothing big can be accomplished without both sides compromising. But the speaker says compromise is impossible so the budget is a dead issue.

This is precisely the wrong conclusion.

A number of factors, including an improving economy, surprisingly slow growth in health care inflation, very low interest rates and tight caps on discretionary spending will combine to stabilize the debt relative to the economy for the next few years.

Nothing has changed, however, about the fiscal fundamentals and the long-term challenges. The debt is still projected to rise. Health care costs still remain a challenge. Social Security still promises more than the current system can deliver and the tax code remains an inefficient mess that doesn’t produce enough revenue for an aging population.

If the stars are not aligned to produce a “grand bargain” to deal with all of that in this election year, so be it. But we can’t just pretend that these problems have been cured or that they will somehow resolve themselves.

The public deserves to hear not just what’s been accomplished but what still must be done. In his State of the Union Address, the President failed to provide that critical message. Perhaps he will do better in his upcoming budget proposals in March.