The Obama debt plan, lightly dissected
Here is a pretty good rundown of President Obama’s plan from Goldman Sachs (with my comments in bold):
1.The president proposes to reduce the deficit by a cumulative $4 trillion over twelve years (through 2023), though it is not entirely clear what baseline this savings number is relative to.
Yes, this confused me, too. It is easier to look at the year deficit- and debt- to-GDP numbers. But it also tough to do this since the White House hasn’t put out a breakdown. Instead it produced this: “The Administration projects that this framework will reduce deficits as a share of our economy to about 2.5% of GDP in 2015, and put deficits on a declining path toward close to 2.0% of GDP toward the end of the decade.” What does “close to” mean? I dunno. And what about the strange use of a 12-year budget window to make his cuts look bigger. Very weird. Will this ever by submitted to the CBO?
2. The president also proposes to establish a debt trigger that would enforce across the board cuts in spending and “tax expenditures” if by 2014 “the projected ratio of debt-to-GDP is not stabilized and declining toward the end of the decade.” For example, the current CBO baseline assumes an increase in the debt to GDP ratio from 2018 to 2020 of 75.3 to 76.2, so if this policy were to apply today (rather than 2014 as proposed), it would imply additional fiscal tightening as we understand the proposal.
The WH numbers appear to be close to Paul Ryan’s numbers which would mean a debt ratio stabilized around 70 percent, much better than the 87 percent of his previous budget.
3. More discretionary cuts reflect recent congressional debate. President Obama’s new proposal would reduce non-defense discretionary spending by an additional $200 billion over ten years compared with the freeze proposed in his FY2012 budget, released in February. To some extent this probably reflects the fact that any freeze over future years would start at a lower level, and thus presumably generates additional cumulative savings.
The budget deal would supposedly cut $315 billion over ten years, so Obama is expecting to cut less than that.
4. The president indicates that additional savings would also be found in defense discretionary spending; the White House fact sheet identifies $400bn in savings over twelve years (through 2023) beyond the savings from ramping down overseas military operations. Some of this reduction appears to be new, but it isn’t clear how much it overlaps with existing proposals to reduce defense spending.
Taxes: Few specifics. The president endorses the concepts behind the fiscal commission’s proposal, namely to reform the tax code and reduce tax expenditures. Note that the fiscal commission recommendations included multiple reform scenarios. He also indicates that increased revenue should make up only one quarter of total budgetary savings (including interest savings), in line with the fiscal commission’s approach. Note that the president’s budget in February already assumed expiration of upper-income tax cuts after 2012 as well as a limitation on itemized deduction by higher-income taxpayers; we assume the discussion of those issues in his speech relates to those proposals.
What expenditures would be reduced or eliminated? How much would rates be lowered? As low as Bowles-Simpson recommends? Again, I dunno. How this is structured also determine ether the middle-class would have a higher tax burden. But maybe Obama, as he is hinting, is promoting the theory that only higher tax rates are tax hikes, not fewer tax breaks.
Mandatory spending: Less deficit reduction than the House proposal. President Obama proposes $340bn in savings from additional health reforms over the next ten years. This does not appear to involve the fiscal commission’s recommendations. Instead, it assumes savings from setting an even lower spending growth goal of GDP + 0.5% for the Independent Payment Advisory Board (IPAB) set up under last year’s health reform law, as well as $100bn in Medicaid savings and $200bn in Medicare savings. This is a much lower aggregate deficit reduction amount from this segment of the budget than included in the House Republican budget resolution, which proposes $1.1 trillion in savings compared with the President’s FY2012 budget. The President proposes $360bn in savings through 2023 (i.e. over twelve years) in “other mandatory” spending, compared with the House proposal to reduce spending by $1.8 trillion through 2021 (i.e. over ten years).
This is a combination of placing greater faith in Obamacare cost controls and across-the-board spending cuts. But the cuts are not enough long-term to prevent Obama or a Democratic successor from having to raise middle class taxes.
Social Security: No near term changes. Like congressional proposals, the president does not propose any near term savings from the Social Security program, though he endorses long-term reform.