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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 / April 8, 2013

Copies of President Obama's budget plan for fiscal year 2014 are prepared for delivery at the US Government Printing Office in Washington Monday.

J. Scott Applewhite/AP

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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.

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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.”

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.

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