Greg Ip

Articles by The Economist’s U.S. Economics Editor

The federal budget: Austerity Lite

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A feeble offering from the president; but there are a few signs of hope

Feb 17th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] FOR years America’s politicians have delivered only pious words about the deficit. With the financial crisis and the recession now in the rear-view mirror, this year was supposed to be the time when Barack Obama and Congress would shift towards austerity. The competing budget proposals of congressional Republicans and the president do contain hints that such a moment has arrived—but only by the sadly low standards of the current fiscal debate.

Mr Obama’s budget proposal, unveiled on February 14th, calls for $1.1 trillion in spending cuts and tax increases over the next decade. “Making these spending cuts will require tough choices and sacrifices,” he declared. Of the savings, $400 billion would come from freezing for five years the level of discretionary spending, excluding security. (Discretionary spending must be authorised annually by Congress.) To reach that target, Mr Obama calls for killing or shrinking some 200 programmes. Many are dear to his liberal base, such as heating subsidies for the poor and college grants for summer study, and their presence on the chopping block is meant to burnish Mr Obama’s fiscal credibility. Civil-service pay would be frozen for two years. As for security, the Pentagon’s budget would be cut by $78 billion over five years and spending on the wars in Iraq and Afghanistan reduced. Total discretionary spending would thus shrink to just 5.6% of GDP, which would be the lowest in at least 40 years.

Mr Obama’s budget proposal projects that the deficit will fall from a post-war record 11% of GDP in the current fiscal year to 3.1% by 2021. That would stabilise the debt, albeit at a still-lofty 77% of GDP. A stable debt ratio is the litmus test of a sustainable budget.

Sadly, a closer look suggests that the budget would have almost no chance of achieving this.
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Written by gregip

February 17, 2011 at 5:33 pm

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