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Obama to Propose ‘Glide-By’ Budget With Eye on Midterms

(Corrects title of former OMB official in third paragraph.)

President Barack Obama’s budget plan moves the spotlight away from reducing U.S. deficits and instead seeks new spending to energize the Democratic base and give incumbents a job-creation platform for November’s midterm elections.

The spending blueprint for fiscal 2015, to be released March 4, will maintain current positions rather than break new ground, according to an administration official who spoke on condition of anonymity before the budget is released. After taking political heat from fellow Democrats facing re-election, Obama dumped his proposal to restrain Social Security payment increases to help reduce the deficit.

It’s “a glide-by budget,” said Joseph Minarik, chief economist at the Office of Management and Budget under President Bill Clinton.

“There’s a strong sense that we’ve done what we’ve done at this point -- so we try to get through the end of this year without making any waves,” Minarik said. “For many people, that’s the most important consideration.”

As part of the election-year strategy, Obama is proposing $56 billion in new spending, a bite-sized agenda including the repackaging of previous budget proposals to increase what he calls “investments” in education, job training and research.

It may require getting past the election before serious debate resumes on the budget, immigration, minimum wage, trade, highway funding or the tax code.

‘Appease’ Base

“Stay on midterm message, appease the base, and run out the clock” seems to be the message from House Republicans and Senate Democrats, Chris Krueger, senior policy analyst, wrote in a Guggenheim Securities market commentary Feb. 26.

“I just don’t see any new spending there whatsoever,” said Greg R. Valliere, chief political strategist at Potomac Research Group in Washington. “An open question is whether there’ll be a budget at all this year.”

The Congressional Budget Office projects the federal deficit will decline to $514 billion this year, the smallest in six years, from a record $1.4 trillion when Obama took office in January 2009.

The 2015 budget will show further improvement, with the deficit-to-gross domestic product ratio projected to fall “below 2 percent” during the next 10-year period, White House spokesman Jay Carney said Feb. 25. That compares with 9.9 percent when Obama took office. CBO estimates that the deficit would be about 4 percent of GDP in 2024, based on current law.

‘Deficit Reduction’

“You’re going to see the president’s budget once again, as it has in previous years, continue to propose deficit reduction over the medium and long run as it makes investments in jobs and priorities as well,” Jason Furman, the White House chief economist, said Feb. 4.

Furman said the deficit will “decline as a share of the economy to about 2017 or 2018 and then, absolutely, we need to do more over the medium and long term,” when spending exceeds revenue by about $1 trillion in 2022, Furman said. Even so, “The most immediate imperative we face is expanding opportunity, and that’s what the president is taking action on.”

Put another way, the Obama administration has cut the budget deficit in half, and says it’s time to shift to policies expanding economic opportunity for all Americans, with a focus on the middle class.

After years of stalemate, Congress, lawmakers and the White House in December reached a two-year budget compromise. Obama said that “should leave us freer to focus on creating new jobs, not creating new crises.”

‘Grand Bargain’

Obama’s change in direction came in a Dec. 4 speech in which he said a “grand bargain” with congressional Republicans wasn’t in the cards in this election year and that it was time to focus on the growing income gap as “the defining challenge of our time.”

“We should not be stuck in a stale debate from two years ago or three years ago,” the president said. “A relentlessly growing deficit of opportunity is a bigger threat to our future than our rapidly shrinking fiscal deficit.”

In a time of divided government, Obama is opting for budget of more modest steps, proposing to spend an additional $28 billion on domestic programs to boost the economy, create jobs, increase jobs skills and improve education, to be financed with tax increases from closing tax breaks and revamping some spending programs.

“His budget is going to express his ideal vision,” Gene Sperling, director of the National Economic Council, said in a Feb. 25 Bloomberg Television interview.

Common Ground

There may be some common ground with Republicans. Obama will again propose changes in the tax code, many of them perennials of budgets past, that are similar to those proposed Feb. 26 by Representative David Camp of Michigan, Republican chairman of the tax-writing House Ways and Means Committee.

Some of the commonality rests in such areas as ending tax advantages for companies doing business overseas, taxing the share of private-equity managers’ profits at ordinary income rates, ending or phasing out some deductions for high-wage earners, and capping the mortgage interest deduction on home loans at $500,000.

Obama allies, such as the Economic Policy Institute in Washington, applaud White House efforts to beef up spending in such areas as education and infrastructure because it “creates jobs today and tomorrow too,” said Josh Smith, a tax and budget specialist at the institute.

‘Snowball’s Chance’

Even so, “these small increases don’t have a snowball’s chance in hell” because of opposition from congressional Republicans, Smith said. “He’s really just yelling into the wind; I don’t even see a back door for him to go through.”

The administration official acknowledged that many of the proposals to close tax loopholes or trim spending in mandatory programs have been offered before and will face a challenging time again.

Senate Republican Leader Mitch McConnell said Feb. 25 he saw no hope for a bill rewriting tax laws in 2014.

The White House has announced some of the items that will be included in the March 4 budget:

-- $56 billion in new spending, half for defense and half for domestic programs, including a four-year, multibillion-dollar package of infrastructure projects;

-- $1 billion for a “Climate Resilience Fund” earmarked to support research on the effect of climate change and help communities struggling from climate change’s effects while creating a fund to finance “breakthrough technologies” and resilient infrastructure;

-- $496 billion for defense, in line with congressionally approved limits, but with a request for $26 billion in additional funds for training and facility repairs;

-- An expansion of the earned-income tax credit, which helps increase money to low-income families through tax refunds;

-- Unspecified funds to establish 45 new manufacturing institutes offering training and apprenticeships, with other institutes designed to cut energy waste;

-- Renewed attempts to reducing Medicare payments to drug companies and care providers, and impose larger premiums on high-income beneficiaries;

-- Another effort to repeal billions of dollars in annual tax breaks to the oil and gas industry, with some savings earmarked for further research on alternative vehicle technology, such as hybrids and electric vehicles, and new tax breaks for the production of cellulosic ethanol, a gasoline alternative.

Elsewhere on taxes, companies such as Boeing Co. (BAC), Caterpillar Inc. (CAT) and Lockheed Martin Corp. are urging the renewal of 55 business tax breaks that expired Dec. 31. The breaks, such as faster depreciation or credits for the purchase of new equipment, have been meant to stimulate economic growth.

Wyden Preference

The new chairman of the Senate Finance Committee, Democrat Ron Wyden of Oregon, has expressed a preference for extending lapsed tax breaks.

Congressional Republicans, seeking to increase control in the House or possibly win a majority in the Senate, have concluded the budget is a secondary issue.

House Majority Leader Eric Cantor of Virginia said his party’s election-year focus is on Obamacare, abuse of presidential powers, the middle class squeeze and job creation.

Maya MacGuineas, president of the Committee for a Responsible Budget, which advocates for smaller deficits, said midterm elections and “the ongoing savagely partisan environment” make progress on the budget unlikely.

“Politics will trump policy,” MacGuineas said in an e-mail. “This is not a good year to expect hard choices.”

To contact the reporter on this story: Roger Runningen in Washington at rrunningen@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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