Obama Admin. to Focus on Budget Issues Ahead

February 21, 2009 06:00 PM

via a special arrangement with Informa Economics, Inc.

End zone for economic stimulus proposals

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

Spending trillions of dollars trying to rescue the U.S. financial system will eventually have the end zone that Washington officials, both in the White House and in Congress, will have to confront: a bulging budget deficit.

On Monday, the Obama administration will host a White House summit on fiscal responsibility, where President Barack Obama will pledge to bring federal spending and tax collections back into balance after a huge spending spree on the economic crisis. Around 130 people have been invited to the event. Obama and Vice President Joseph R. Biden Jr. will open the afternoon meeting, and then participants will break into groups focusing on health care, Social Security, defense spending, the budget process and government procurement. Congressional leaders from both parties will attend, as will most of the chairmen and ranking Republicans on the Budget, Appropriations, Ways and Means and Finance panels.

On Tuesday, Obama will detail the severity of the nation's economic crisis in a speech to a joint session of Congress.

And then on Thursday, the president will deliver a summary of his budget plan to lawmakers. More detailed budget documents will be released later in the spring, including how much the president expects the government to spend overall during each of the next 10 years, how much he expects the Treasury to collect in tax revenue and how big a gap he anticipates between expenditures and revenue.

Obama's goal is to cut the federal deficit in half over the next four years, primarily by raising taxes on businesses and the wealthy (allowing President George W. Bush's tax cuts for families earning over $250,000 to lapse in 2011).and by slashing spending on the wars in Iraq and Afghanistan. In his Saturday radio and Internet address, Obama said he is determined to "get exploding deficits under control" and said his budget request is "sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don't, and restoring fiscal discipline." Reducing the deficit is critical, Obama said. " We can't generate sustained growth without getting our deficits under control."

Facts and figures. White House budget director Peter Orszag said: "We will cut the deficit in half by the end of the president's first term." The plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion by 2013 -- still high but a more manageable 3 percent of the economy.

The plan: While the budget would keep the breaks that benefit middle-income families, it would eliminate them for wealthy taxpayers, defined as families earning more than $250,000 a year. Those tax breaks would be permitted to expire on schedule in 2011. That means the top tax rate would rise from 35 percent to 39.6 percent, the tax on capital gains would jump to 20 percent from 15 percent for wealthy filers and the tax on estates worth more than $3.5 million ($7 million for couples) would be maintained at the current rate of 45 percent.

Obama also proposes an aggressive effort on tax enforcement that would target corporate loopholes. And Obama's budget seeks to tax the earnings of hedge fund managers as normal income rather than at the lower 15 percent capital gains rate --ordinary tax rates are now as high as 35 percent and may rise to 39.6 percent under the administration’s plan.

Overall, tax collections under the plan would rise from about 16 percent of the economy this year to 19 percent in 2013, while federal spending would drop from about 26 percent of the economy, another post-World War II high, to 22 percent.

Some winners ahead. “The president believes there are essentially three areas that have to move forward even as we pare back elsewhere — health care, energy and education,” said David Axelrod, Obama's senior adviser. “These are the bulwark of a strong economy moving forward.” Obama will signal in his budget that expanding health coverage to the more than 46 million uninsured can be done without adding to the deficit, both by making cost-saving changes in the delivery of care and by raising unspecified revenues."I think people will definitely know that the president is taking swift action to invest in renewable energy, and ensure that we reduce our
dependence on foreign oil and that we are taking steps to make health care more affordable for millions of Americans and while providing those that don't have health insurance with access," White House Press Secretary Robert Gibbs said at a briefing last Friday.

A 'bigger and redder' deficit. Gibbs added that the budget presentation "will show you... a deficit far bigger and far redder than what might have first been imagined, because for many years we've used tricks and gimmicks to mask the size of our irresponsibility." But he said the president will use his Tuesday speech to show what has to be done "collectively to get ourselves back on a path toward some sustainable fiscal track."

Gibbs said Obama's speech will be "a much broader economically themed speech, not just the budget." He said Obama will "talk about the recovery plan; he'll talk about foreclosures; he'll talk about financial stability ... and the deregulation of the financial industry to ensure we
don't encounter the same problems again."

Big greenhouse gas emissions bonanza. On energy policy, Obama’s budget will show new revenues by 2012 from his proposal to require companies to buy permits from the government for greenhouse gas emissions above a certain cap. The Congressional Budget Office estimates that the permits would raise up to $300 billion a year by 2020. Since companies would pass their costs on to customers, the Obama plan would have the government use most of the revenues for relief to families to offset higher utility bills and related expenses. The remaining revenues would cover his proposals for $15 billion a year in spending and tax incentives to develop alternative energy.

Meanwhile, the U.S. this week will launch a satellite to measure atmospheric carbon dioxide.

The budget will also detail some of the federal programs Obama will propose to eliminate or streamline, with details to come in April.

House Speaker Nancy Pelosi (D-Calif.) is ordering her committee chairmen to quickly come up with plans for fiscal responsibility hearings," setting a March 13 deadline for “scheduling hearings on overseeing spending in their jurisdiction," Roll Call (subscription) reported.

In a report by the Brookings Institution, authors Alan Auerbach and William Gale predicted that, even under optimistic assumptions, the deficit will "average at least $1 trillion per year for the 10 years after 2009, even if the economy returns to full employment and the stimulus package is allowed to expire in two years." And “ that is without adding all the trillions of dollars in contingent liabilities of the Federal Reserve and the Treasury, which show up nowhere in the budget or national debt numbers,” said Gale.

No more budget gimmicks? The Washington Post reported that Obama has banned four accounting gimmicks that President George Bush used to make deficit projections look smaller. The article said that the price of more honest bookkeeping would be a budget that is $2.7 trillion deeper in the red over the next decade than it would otherwise appear, according to administration officials. The new accounting involves spending on the wars in Iraq and Afghanistan, Medicare reimbursements to physicians and the cost of disaster responses – Obama will budget $273 billion in a 10-year period for natural disasters.

But the biggest adjustment will deal with revenues from the alternative minimum tax, a parallel tax system enacted in 1969 to prevent the wealthy from using tax shelters to avoid paying any income tax -- this means the Obama budget will have about $1.2 trillion less in revenue over 10 years. While Obama's budget will assume no AMT offset; some Republicans question why repeal was not considered

Pain and then gain? Even with bigger deficit projections, the Obama administration will put the country on “a sustainable fiscal course” by the end of Obama’s term, Peter Orszag, the director of the Office of Management and Budget, said Thursday in an interview cited in a New York Times article. Orszag did not provide details of how the administration would reduce a deficit expected to reach at least $1.5 trillion this year. The $2.7 trillion in additional deficit spending, Orszag said, is “a huge amount of money that would just be kind of a magic asterisk in previous budgets.” He said Obama “prefers to tell the truth, rather than make the numbers look better by pretending.”

Obama will budget $401 billion over 10 years for higher costs and interest on the debt.

Congressional Budget Office (CBO) estimates of the budget deficits ahead do not include some of the spending that private industry and that Obama officials will reportedly include in their coming estimates.

Comments: That Washington has been on a massive spending spree is an understatement. I've seen the following perspective on the $787 billion stimulus package: If you spent $1 million a day since Christ was born, you still wouldn't be to the year 2009. And, the stimulus package stacked up in 100-dollar bills would rise around 1,310 miles... about the distance between Washington, D.C. and Minneapolis, Minnesota.

And, I am beginning to sense "spending fatigue" or at least "bailout fatigue" among some lawmakers -- certainly not all of them. The deficit as a percent of the U.S. economy (Gross Domestic Product) will likely exceed 12 percent this year and around 10 percent in 2010 -- easily a post-World War II record.

The future is now clearer than many think: hunkering down will be the rule and not the exception. A decade of deficits of $1 trillion or more will force Washington -- both the legislative and executive branch -- to cut a lot of existing spending, and prioritize future spending. Gone are the days of spending with no strategy in sight. All sorts of programs will come under the spending microscope -- including agriculture spending.

If House Ag Chairman Collin Peterson (D-Minn.) thought inking a new farm bill was difficult in 2007 and 2008, just think what it would be like had lawmakers had to write the omnibus bill this coming year.

Meanwhile, it's not all future budgets that will take focus this week. The House this week is scheduled to take up an omnibus bill for the nine Fiscal Year 2009 appropriations bills (including Agriculture) that stalled last year. The Senate is expected to take up the bill late this week or early next week. The bill, which is around $410 billion, would be about $30 billion, or 8 percent, more than was spent on the nine bills in FY 2008.

And, USDA on Thursday and Friday will hold its annual Ag Outlook Forum during which all sorts of forecasts will be issued, and topics discussed, a virtual information overload in an economic situation that will easily eclipse anything said during the forum.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


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