April 21, 2014

The President's Budget (post St. Patrick's Day hangover edition)

As you recover from what was hopefully a fun-filled St. Patrick's Day, it might be helpful if I were able to convert our latest issue brief into a fun, bite-sized and easily digestible, bullet list of the most interesting things we found in President Obama's first budget submission to Congress.

First some background: in general, every presidential budget is significant because it establishes the priorities and issues which the administration perceives to be most important and how they plan to address and resolve them. The first budget of a new administration is even more important in that it sets expectations for the coming years and how these policies reconcile with the promises made during the campaign. The submission the Obama Administration made at the end of February was just an outline of the larger budget they will present later in the year, but with enough information that Congress can turn towards creating the Congressional budget resolution in the next month or two.

Unlike the iconic shamrock used on St. Patrick's Day, our issue brief contains more than "three leafs" of knowledge [and you should still read the issue brief!]:

  • The budget doesn't actually raise taxes, it cuts them when compared to current tax law.
  • The budget's tax cuts include $2 trillion worth of the Bush tax cuts from 2001 and 2003.
  • These tax cuts are not subjected to pay-as-you-go (PAYGO) budgeting rules.
  • The tax "increases" on upper income individuals that result from allowing some of those Bush tax cuts to expire, only raise $637 billion.
  • The budget contains a "down-payment" on health care reform (the Administration's term), meaning they expect reform to have a total cost of substantially more than the $634 billion set aside.
  • The health care reform money is contained in a "reserve fund" that enforces "deficit neutrality" -- meaning the net effect of reform on the deficit is intended to be zero over the 10-year budget time frame. Thus all the new reform spending in this fund is paid for by spending cuts and tax increases.
  • In the health reserve fund, however, these offsets are not shown as raising either revenues or spending in the budget even though they will do both.
  • The reasonable offsets for health care reform are already coming under criticism from proponents of health care reform who are worried that reform won't pass because of these offsets, not disagreements over health policy.
  • Concord's opinion is that such an excuse doesn't make much sense because if the really difficult issues of health care reform are agreed upon, torpedoing necessary reform because of unrelated, fiscally responsible offsets is not in the interests of the coalitions promoting reform.
  • Furthermore, if health care reform is not paid for, even if over the long-run such reform translates into some savings (and how that is achieved isn't specified in the budget), we might never get to the long-run because we are swamped by debt before then.
  • The budget improves transparency by including the costs for patching the alternative minimum tax (AMT) and outlays related the wars in Iraq and Afghanistan--something recent budgets have not included.
  • The claim to $2 trillion in net savings from the budget comes primarily from a draw-down in overseas military operations ($1.49 trillion) and repeal of the upper-income Bush tax cuts ($637 billion). Yet, there needs to be a caveat in that the war spending savings is based on a relatively unrealistic assumption that the war would continue to cost the same amount annually over the next 10 years, that it cost last year.
  • Another caveat has already been mentioned: that under current law, those upper-income tax cuts are already scheduled to expire.
  • Mandatory spending and net interest are projected to consume 72% of the overall federal budget by 2019.
  • While net interest costs will fall in the immediate years due to declining interest rates, these costs are expected to rapidly increase due to large accumulations of debt -- reaching $622 billion in 2019 alone.

--Josh Gordon