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BREAKINGVIEWS – Obama’s 2011 budget underlines depth of US woes

By Reuters Staff
February 1, 2010

– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –

By Martin Hutchinson

WASHINGTON, Feb. 1 (Reuters Breakingviews) – President Obama’s 2011 budget underlines the depth of U.S. fiscal woes. By then, bailouts and stimulus outgoings will be all but over, recovery should be under way, and Obama’s promised spending freezes should be in place. Yet the deficit next year will still be an eye-watering $1.3 trillion. Bigger spending cuts are needed — and soon.

Monday’s budget for the year ending in September 2011 includes higher federal spending than the Congressional Budget Office estimated as recently as Jan. 26, despite Obama’s freezes. With lower revenue as well — thanks largely to the CBO’s overly optimistic assumptions about tax revenue — the deficit is projected to be $287 billion bigger than the CBO expected.

Over the next decade, the projected cumulative deficit in Obama’s budget is some $8.5 trillion, $2.5 trillion more than the CBO forecast a week ago — and that is probably optimistic.

A comparison of Obama’s budget with the projections for 2011 in Bush’s first spending plan, presented in February 2001, highlights both the tendency of outcomes to be worse than the more distant projections and the bipartisan nature of recent U.S. fiscal indiscipline.

Bush forecast spending in fiscal year 2011 of $2.7 trillion, just a little more than 15 percent of projected GDP. That was too optimistic — even in 2002, federal government spending was nearly 18 percent of GDP. And Obama’s budgeted spending in 2011 of $3.8 trillion is more than 25 percent of GDP.

An equivalent slippage from the current budget for 2020 would leave government spending by then at around a third of GDP, well above the level in most European Union countries once U.S. state and local spending is included.

Faster-than-projected economic growth could alleviate this problem, as it has in the past. But with U.S. government debt already at 64 percent of GDP, slow growth with occasional efforts at further stimulus spending — an echo of Japan’s experience in the 1990s — would soon put the United States on track towards Japan’s current debt level of around 200 percent of GDP.

If Obama’s 2011 budget is supposed to mark the start of a more disciplined approach to spending, he’ll need to follow it with much tougher measures. Fiscal profligacy has been a bipartisan vice over the past decade. It deserves a rapid bipartisan reformation.

CONTEXT NEWS

– President Obama’s federal budget for the year to September 2011, unveiled on Feb. 1, includes receipts of $2,567 billion, outlays of $3,834 billion and a deficit of $1,267 billion. Revenue is $103 billion less than in the Congressional Budget Office projection of Jan. 26, outlays are $184 billion more and the deficit is $287 billion higher. That’s despite the spending freezes Obama pledged on certain categories of expenditure in his State of the Union address last week.

– Federal spending of $3,834 billion in the year to September 2011 (25.1 percent of GDP) is 41 percent higher than the $2,706 billion, or 15.4 percent of expected GDP, projected for that year in the budget presented by President George W. Bush in February 2001.

– The projected U.S. deficit for the year to September 2010 is $1,556 billion, $207 billion higher than the CBO projection for that year. Obama’s projected cumulative deficit for 2011-2020 is $8,532 billion compared with $6,047 billion in the CBO projection of Jan. 26.

– White House budget: http://r.reuters.com/nuq96h

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(Editing by Richard Beales and Martin Langfield)

((martin.hutchinson@thomsonreuters.com)) Keywords: BREAKINGVIEWS DEFICIT/

01FEB10 16:04RTRS [nN01161731] {C}ENDS

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