The president’s budget: Another doomed exercise
Politics has tied budget-making in knots
[Greg Ip] Feb 18th 2012 | WASHINGTON, DC | from the print edition
BACK in 2009 Barack Obama’s first budget called for repealing his predecessor’s tax cuts on the rich, eliminating tax breaks for multinationals and boosting the tax rate on capital gains. A year later Mr Obama repeated those proposals, and added new ones: no more breaks for fossil-fuel producers and a “financial crisis responsibility fee” on banks.
On February 13th Mr Obama issued his fourth budget. Besides recycling the proposed tax increases of previous years, it also proposes repealing the preferential tax rate on dividends for the wealthy, and penalising multinationals that outsource jobs. In all, the budget would raise taxes on companies and the wealthy by $2 trillion over the next ten years.
There is little reason to think Congress is any more likely to grant those tax increases than their predecessors. Of course, Congress tends to be unco-operative when it comes to fiscal matters; since the House holds the purse-strings, a president’s budget has always been as much aspiration as road map. But the gap between aspiration and reality is now enormous. Mr Obama’s first budget foresaw the budget deficit, then roughly 10% of GDP, falling to 3.5% this year. Instead, it will clock in at 8.5% (see chart). The public debt was supposed to peak at 67% in 2011. Mr Obama now sees that happening in 2014, at 78%.
In part that is because of a worse than expected economic situation. A smaller economy puts upward pressure on debt and deficit ratios, and leads politicians to shift priorities—sensibly—from balancing the budget to stimulating growth.
More important, though, is that political polarisation has left America’s budget process in a shambles. Congress is supposed to use the president’s budget as a guidepost to its own budget-writing. Under current procedures, the House and the Senate are supposed to pass a common budget resolution setting broad totals of spending and taxes to which committees overseeing specific programmes must, in aggregate, conform.
However, Congress has not passed a budget in the last two years. The Republican-controlled House passed its own last year, among other things proposing a radical downsizing of Medicare. The Democratic controlled Senate has not, in part because Senate rules make it harder for a resolution to get through when the opposition party doesn’t co-operate.
The process could clearly be improved. On February 8th the house passed a proposal by Paul Ryan, the House Budget Committee chairman, and his Democratic counterpart to allow the president to reject specific items in spending bills; Congress would ratify or reject the president’s recommendations in an expedited process.
But Jim Horney, of the liberal Centre on Budget and Policy Priorities, says today’s stalemate is not the fault of the process itself; divided government produced landmark budget deals in 1990 and 1997. He blames the canyon between the two parties’ visions. Republicans, in particular, maintain a united party line against tax increases, and the party’s leadership has usurped the power of individual committee chairmen to cut deals across the aisle.
Keith Hennessey, a former economic adviser to George Bush, says the sheer scale of America’s fiscal problems also makes it harder to agree, because they require increases in taxes or cuts to entitlements that go well beyond what either party has previously had to swallow. Minor concessions become impossible to justify: why enrage your political allies with a gesture that fails to solve the problem? That is why Mr Obama’s budget makes only token cuts to entitlements.
With both the president and Congress unable to implement an overarching vision, fiscal policy is now largely conducted in bare-knuckle bargaining sessions against looming deadlines: a government shutdown last April, a federal default last August. This last deal imposed stringent caps on discretionary spending that will tighten even further when an automatic “sequester” takes effect in January 2013. Mr Obama’s budget claims to be a superior deficit-cutting alternative to the sequester.
Whether the sequester actually happens is anyone’s guess. Forecasting fiscal policy is almost impossible when so much of the budget is temporary: 41 separate tax provisions are due to expire this year, from excise taxes on petrol to Mr Bush’s tax cuts. On February 14th Republicans agreed to extend one of those provisions, a temporary payroll-tax cut due to expire on February 29th, to the end of the year. It may be the only part of Mr Obama’s budget that passes this year. Not surprisingly, it expands rather than shrinks the deficit.
The original article is linked here.