international analysis and commentary

Three myths about President Obama’s budget


On February 13, President Obama released his fiscal year 2013 budget. It is a good opportunity to address three common myths about the budget that have been floating around. These myths are technically true, but highly misleading.

Myth number one is: It doesn’t matter because it won’t pass. Many countries have parliaments that are characterized by a unified legislative power structure: the prime minister is elected by a majority of the members of parliament, and he or she appoints a government.  Because a budget is a reflection of the prime minister’s policy agenda, a budget that is rejected by parliament would certainly be a big deal, as it would suggest that the prime minister is weak.

The United States is different because it is characterized by a strong separation of powers—in this case, the relevant actors are the President, the House of Representatives, and the Senate.  Now, it’s true that the President’s budget goes by the very authoritative-sounding name “The Fiscal Year 2013 Budget of the U.S. Government”. But don’t let that fool you.  It is simply the president’s budget proposal.

Will it pass? Of course not.  The Constitution is clear that Congress—not the president—is the primary actor in the budget process, and subsequent reforms have only reaffirmed that role.  Even when the president’s party commands large majorities in the House and Senate, Congress will still write its own preferred budget.

So what’s the point of the president’s budget? First, it’s the product of an intensive process that involves input from and conversations between the various agencies and departments, the president’s budget office, and the president himself.  Even with an extremely oppositional Congress, the Congressional budget-writing committees may still defer to the president’s budget on many of the more mundane policy, funding, and management proposals.

Second, the release of president’s budget kicks off the budget process. The action now heads to the budget committees in the House and Senate, who paint the broad brushstrokes of the budget, and the appropriations committees, who fill in the programmatic details.  Once the House and Senate are able to agree on a spending bill, it then goes to the president, who may sign or veto it. If the latter, it goes back to Congress and the process is repeated.

As you can see, the president’s official role in the budget process is limited. The budget that gets signed into law will be the product of a complex and often drawn-out negotiation between the president, the House, and the Senate.

Myth number two is: the budget adds nearly $7 trillion in deficits. This myth is usually used as an attack on the president’s budget.  This attack is especially resonant now because the deficit is higher that it has been historically (largely a function of the economic downturn), but it is common to hear this myth no matter who is in office, and no matter the actual numbers in the budget.  Like the others, this myth is usually true but misleading.

Take the president’s budget.  It estimates that if every policy recommendation is followed, annual deficits will total $6.7 trillion though 2022, pretty close to $7 trillion. So why is that misleading?

Because what the budget projects is different from what a budget does.  I’ll give you an example. Under the president’s budget, the deficit rises by over $300 billion through 2013 from a combination of spending increases and tax cuts (to create jobs).  But remember, the economy is in the midst of a recovery—a weak one, to be sure, but a recovery nonetheless.  As the economy improves, the deficit will fall because (1) newly employed workers will start paying taxes on their new income and (2) fewer people will be forced to rely on the social safety net (i.e. public health insurance, food assistance, etc).  In other words, even if we do nothing, the deficit will fall.  And that’s exactly what the budget projects: by 2013 the deficit will fall from $1.3 trillion to $670 billion.

The fact is, the deficit trajectory is determined by three factors: economics, demographics, and policy. When we talk about budget projections, we include all these factors, because they all determine the path that the deficit takes.  But when we talk about what the budget does, it is important to isolate the policy changes from the other factors.  To do that, we create a “plausible baseline”, which is a projected spending, revenue, and deficit path in the absence of policy proposals, and then we measure just the policy proposals against this baseline.

Under its plausible baseline, the budget projects that economic and demographic factors by themselves would lead to $8.7 trillion in deficits over the next decade. Taken in total, the president’s policy proposals actually reduce the deficit over the time period by nearly $2 trillion.

Myth number three is: Same old, same old. It is true that many presidents’ budgets are just a recycling of the same policies not enacted since the last budget, plus one or two more thrown in for good measure. But this budget is different in a couple ways.

First, there was a strong focus on job creation.  Last year’s budget hardly mentioned job creation at all, electing instead to focus on deficit reduction.  The Republicans had recently won a significant election victory in part by campaigning against deficits, so last year’s budget was likely devised with one eye on a possible deficit reduction deal.  That was bad economics, because the weak economy needed additional fiscal stimulus.  It also failed, because Congressional Republicans weren’t that interested in making a deal in the first place.

This year the budget included over $300 billion in fiscal stimulus. This includes middle class tax cuts, business tax cuts, unemployment benefits, infrastructure investments, school repair and modernization, retaining or rehiring teachers and first responders, and various other proposals.  All together, the Economic Policy Institute estimates that these proposals would create 1.5 million jobs in 2012 and 1.3 million jobs in 2013.  With nearly 13 million Americans unemployed, that’s an important step forward.

And second, the president has finally fully embraced tax fairness. In past budgets he had proposed restoring the higher rates that upper-income taxpayers paid throughout the 1990’s, prior to President Bush’s multiple rounds of tax cuts.  But even if he had been successful (he was not), many upper-income taxpayers would have still paid lower tax rates than middle-class taxpayers because they receive much of their income as capital gains or dividends, which are taxed at preferential rates.  So this year the president also embraced a policy in which people making over $1 million must pay at least 30% of their income in taxes, thus ending the federal subsidization of wealth accumulation for the very rich.

In sum: no, the president’s budget won’t pass without substantial changes from Congress; no, the president’s budget actually reduces the deficit even though a combination of economic and demographic factors will continue to exert upward pressure; and yes, the budget is quite different from past budgets, focusing more heavily on jobs and tax fairness.  But this is only the beginning of what will undoubtedly be a very exciting budget season. So stay tuned!