Judging the Budget as Though It Actually Mattered
The obsessive attention paid to White House budget proposals always reminds me of a Woody Allen joke: "I've worked everything out to the last detail. Now all I need is the main points." The effort expended on the administration's budget seems insane when you remember that the whole production is just a suggestion, and that Congress is the branch of government that says what taxes and spending will be. The separation of powers, if you will, is the main point.
It's a political more than policymaking exercise -- and seen that way, this year's budget looks smart. At the cost of offending some progressives, it's a plan that could split a few sensible Republicans from the herd.
However, as a tribute to the officials who worked on "Extend temporary minimum Low-Income Housing tax credit (LIHTC) rate for non-Federally subsidized new buildings" and "FDA: Cosmetic facility registration fees" let's take it all seriously, forget the political machinations and assume that the budget was simply enacted whole. Would it be a good one?
Not bad, in my view.
It would reduce the deficit from 7 percent of gross domestic product in 2012 to 2.3 percent by 2018, when the administration assumes the economy will be back at full employment. (These numbers, like all the rest, of course, depend on the administration's economic assumptions: They're roughly in line with everybody else's.) Thereafter the deficit falls a bit more, to 1.7 percent of GDP by 2023. The primary (non-interest) budget balance would be in surplus by 2019. This is enough fiscal tightening to keep public debt on a gently declining path from its peak of 78 percent of GDP in 2015 to 73 percent by 2023, the end of the projection period.
Now, this profile of fiscal consolidation is admittedly less than ideal, and not what the administration would prefer. It starts too abruptly and then fades out. With the economy still growing only slowly, unemployment high and borrowing costs very low, an easier fiscal stance this year and next would be better. A decidedly firmer squeeze should then come later. Over the longer term, the debt ratio should be on a path that will reduce it to less than 50 percent of GDP. Why? So that the fiscal capacity to respond to the next crash is restored.
Unfortunately, good economics is politically impossible. The administration's plan gets good marks because it's less front-loaded than the alternatives being debated in Congress and, when it comes to long-term control, much more credible.
It's more credible partly because, as Barack Obama says, it's balanced. Taxes rise from a temporarily depressed 15.8 percent of GDP in 2012 to 18.9 percent in 2018 and 20 percent in 2023. That long-term ratio is 2 percentage points higher than the post-1973 average. Outlays fall from 22.8 percent of GDP in 2012 to 21.7 percent by 2026, a shade above the post-1973 average.
Republicans will attack this step-rise in the tax burden and say the budget makes permanent some of the growth in government of recent years. True, up to a point. But the context makes the budget's squeeze on spending tighter than these aggregates suggest. Discretionary defense and non-defense spending fall from 8.3 percent of GDP in 2012 to 5.8 percent in 2018 and less than 5 percent in 2023. That's demanding. Mandatory spending -- mainly Social Security and Medicare -- grows from 13.1 percent of GDP to 13.9 percent in 2023, despite the administration's proposals, notably the move to chained consumer price index, to curb their cost. Short of fundamental entitlement reform, which the country doesn't want, this is probably the best that can be done.
Overall, the split between higher taxes and tighter control of spending looks about right -- especially since Obama's tax proposals are themselves moderate. He wants to cap income-tax deductions at 28 percent for the highest-income families. That's a good idea. It broadens the tax base and raises revenue without increasing marginal rates. A more thoroughgoing tax reform should aim to reduce the value of deductions much further, but this is a good start. The Buffett Rule, requiring the very rich to pay at least 30 percent of their income in tax, is a rough-and-ready way to attack anomalously low tax rates on investment income. The proposal to close the carried-interest loophole makes sense too. Along with the cap on deductions, these will do until a genuinely comprehensive tax reform comes along.
The economics of the budget isn't bad, and the politics, as I say, looks smart. Progressive anger over chained CPI and other supposed atrocities is a good thing. It deflects Republican criticism and makes Obama look moderate and responsible -- which, in this budget, he is. Over to Congress.
(Clive Crook is a member of the Bloomberg View editorial board. Follow him on Twitter.)