President Obama’s proposed budget for FY 2014 represents an important contribution to a desperately needed national discussion about our long-term fiscal future. As such, it deserves a careful examination—not the reflexive chorus of cheers and boos (mostly the latter) that it has received so far.
Let’s begin with the basics. Over the next decade, the president’s budget would take total revenues from 16.7 percent to 20.0 percent. Outlays would fall from 22.7 percent in FY 2013 to 21.8 percent in FY 2015 and remain at roughly that level over the next eight years. The debt held by the public would rise by $6.6 trillion, from $12.4 trillion to $19.0 trillion, but would fall modestly as a share of GDP from 76.6 percent to 73.0 percent.
As foreshadowed in a week of selective leaks, Obama reaches this result by putting last December’s proposed compromise package back on the table and offering other proposals, for total deficit reduction of $2.5 trillion over the next decade. A portion of this total would offset the elimination of the sequester, which would add $1.1 trillion to outlays, leaving a net deficit reduction of $1.4 trillion between now and 2023.
No doubt there will be a robust debate about both ends and means. Some Keynesian Democrats will say that Obama is taking deficit reduction too seriously; Paul Ryan Republicans will say the opposite. Liberals have already protested proposed cuts to Medicare and Social Security, while conservatives have flatly rejected proposed tax increases.
But before we even reach these matters, there is a prior question: Does the president’s budget rest on realistic assumptions? In some respects, yes. For example, as the economy continues to recover from the lingering effects of the Great Recession, interest rates on Treasury bills and notes will move up from today’s artificially low levels to their historical averages. Unemployment falls slowly but never goes below 5.4 percent. Inflation remains stable at roughly 2 percent per year.
On the other hand, the budget assumes that there will be no recession between now and the end of FY 2023. GDP growth rises from 2.3 percent in 2013 to 3.6 percent in 2016 before subsiding to today’s levels. To be fair, no budget ever forecasts a recession in the out-years. Still, achieving the objective of stabilizing the debt to GDP level relies on fourteen consecutive years (2010-2023) of uninterrupted economic growth, which would be unprecedented.
The president’s spending projections are even less realistic. Between 2013 and 2023, defense spending is projected to fall by 40 percent as a share of GDP, from 4.0 percent to 2.4 percent, while non-defense discretionary programs fall by one third, from 3.7 percent to 2.5 percent. This is barely imaginable, but highly unlikely. During the past half-century, defense spending has never gone below 3 percent of GDP, not even in the years between the fall of the Soviet Union and September 11, 2001. Non-defense spending has never gone below 3.2 percent, a level it reached near the end of the Clinton administration. (During the Reagan era, it never went below 3.5 percent.) It is hard to believe Obama’s proposals would allow us either to meet our basic security needs or to afford the level of public investments that have helped sustain economic growth throughout our national history. It’s up to senior administration officials to make the case that their numbers are realistic, and they’ll face a heavy burden of proof.
Meanwhile, even with proposed cuts in Medicare and Social Security, these programs continue to expand inexorably as a share of GDP while Medicaid’s share rises by 25 percent over the next decade and the burden of interest on the debt doubles from 1.4 percent to 2.9 percent.
In short, even with substantial increases in revenues, the swelling pressure of entitlements and debt is leading our country to shortchange its future. Is that the course we want, or are we backing into it because we aren’t willing to challenge the assumptions that are producing it? Before we get mired in technicalities, that’s the threshold argument we should be having.