Obama budget plan would cut deficits – but enough?

A sketch of President Obama's new budget proposal shows a modest amount of deficit reduction, but some experts say more is needed to set the US on a stable economic path.

By , Staff writer

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    Copies of President Obama's budget plan for fiscal year 2014 are prepared for delivery at the US Government Printing Office in Washington Monday.
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A preliminary sketch of President Obama’s new budget proposal has emerged, and the president is proposing some deficit-reducing entitlement reforms and tax hikes, but not enough to bring the national debt sharply downward.

The question is, would that be good enough to put the economy on solid footing for the next decade?

For his part, Mr. Obama says yes, saying Saturday that his budget proposal midweek will be a “fiscally-responsible blueprint for middle-class jobs and growth.”

Recommended: How much do you know about US entitlement programs? Take our quiz.

Economists don’t have a unanimous answer to the question, but some prominent finance experts – including Federal Reserve Chairman Ben Bernanke, argue that the goal of a healthy economy hinges on bringing the debt downward, not just trying to keep it from getting bigger.

“Fiscal policymakers will have to put the federal budget on a sustainable long-run path that first stabilizes the ratio of federal debt to GDP and …  eventually places that ratio on a downward trajectory,” Mr. Bernanke said in February.

According to early signals from the Obama administration, the president’s plan will include both new tax revenue and proposed changes that would reduce the future cost of both Social Security and Medicare – in part by adopting a controversial change in the way Social Security’s annual cost-of-living adjustments are calculated.

In all, Obama’s plan will call for nearly $2 trillion in new deficit reduction, relative to a baseline forecast, Obama said in his Saturday address to the nation. When added to prior budget moves he has supported, “that surpasses the goal of $4 trillion in deficit reduction that many economists believe will stabilize our finances,” he said.

Few economists support a rapid fiscal adjustment that “front-loads” big tax hikes and spending cuts in the next couple of years. That could damage an already weak jobs recovery, they argue. But many economists also see a risk in moving too slowly.

The national debt may already be large enough to be having a negative effect on economic growth. And, if the debt isn’t trimmed back, its size leaves little cushion to cope with potential hard times in the future. Viewed in that light, Obama’s $4 trillion goal may be too low.

Obama seems to be opting for a philosophy that small and slow adjustments are the right approach to reducing federal deficits.

In his Saturday address to the nation, he said his budget “doesn’t make harsh and unnecessary cuts that only serve to slow our economy.”

Translation: He’s replacing the “sequester,” the automatic federal spending cuts of some $1 trillion over the next 10 years, which recently went into effect. And he’s not following the plan charted by Rep. Paul Ryan and House Republicans, which would cut federal spending sharply from currently projected levels.

Obama's plan removes the sequester's across-the-board spending cuts, while adding in other reforms designed to slow the growth of entitlement spending, and would raise new tax revenue by reducing deductions for the wealthy.

Would that bring the debt down? Probably a bit, but not in a dramatic way.

For example, when Senate Democrats recently put forth their own budget plan with a similar $4 trillion goal, the projected result was that public debt would total 70.4 percent of gross domestic product in 2023.

In the current fiscal year public debt totals 76.3 percent of GDP, and last year it totaled 72.5 percent.

By a broader measure called “gross debt,” which includes obligations to entitlement trust funds, the national debt is already equal to a year’s GDP. Some economic studies conclude that debts that high often crimp the pace of economic growth.

Some fiscal watchdog groups say the bar should be set higher. The Committee for a Responsible Federal Budget has called for at least $2.4 trillion in new deficit reduction by 2023 – whereas Obama’s total this week may come in at about $1.8 trillion.

The good news, for people interested in controlling the debt buildup, is that leaders on both sides are laying out plans and espousing a readiness to bargain. Obama is taking a step that roils his political base by saying he’s open to adjusting the formula for annual step-ups in Social Security benefits.

And as Bernanke noted, stabilizing the debt may be a first step toward eventually bringing it down.

A key challenge is the arc of baby boomer demographics. Bringing debt down modestly by 2023 doesn’t mean it will keep falling during the following decade, as more boomers draw on Medicare as well as Social Security.

That’s why many finance experts say it’s wise to take steps sooner, rather than later, to reform those programs so they’re on sounder financial footing. Waiting only makes the challenge bigger.

And one thing both deficit hawks and doves generally agree is this: It’ll be easier to reduce deficits and debt if jobs and incomes are growing.

“Nothing reduces deficits faster than a growing economy,” Obama said Saturday.

The debate ahead will hinge on what blend of policies will best match fiscal prudence with economic growth.

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