It’s Budget Day in Washington, and President Obama is taking a sharp turn from the past.
Gone is an emphasis on deficit reduction. Talk of putting Social Security and other safety net programs on a more sustainable path has also been put to the side. Now, with deficits down, Mr. Obama is focused on boosting the middle class and reducing income inequality. That means higher taxes on wealthy Americans and corporations and more government spending.
“What I’d like to see is not only that the economy continues to grow, but I also want to make sure that everybody’s benefiting,” Obama told NBC News Sunday, looking ahead to his final two years in office.
The result is a nearly $4 trillion federal budget plan for fiscal 2016 that ditches what Obama calls “mindless austerity” and raises spending for domestic priorities – foremost on education, infrastructure, and tax relief for middle-income Americans – as well as on national security. By proposing higher defense spending, Obama hopes to lure Republicans into a deal.
Many Republicans agree that the “sequester” – the automatic, across-the-board spending cuts put in place two years ago – is a bad way to budget. But they’re not ready to go along with what Obama has in mind. And so while deficits are down, that doesn’t necessarily mean Washington is on the verge of a spending spree.
Political reality points to a tough slog ahead. Republicans now control both houses of Congress, and if they can agree amongst themselves on what to present Obama – and that’s a big “if” – he could face tough choices of his own later this year to keep the government running.
What’s more, deficit hawks have hardly given up. They point to retiring Baby Boomers and the prospect of skyrocketing interest payments on the debt with alarm. Though annual deficits have shrunk markedly from the early Obama years, they will begin to rise again in 2018, reaching $1.1 trillion in 2025, the nonpartisan Congressional Budget Office said last week. If Obama’s 10-year budget plan were to become reality, nearly $6 trillion would be added to the federal debt, which now stands at $18 trillion.
But for now, Obama is all about planting a flag for the middle class, which involves “investment” – i.e. spending. Presidential budget proposals are a statement of priorities, and the opening bid in a negotiation, not a blueprint for what will happen.
In the shadow of 2016
This year, as the race to succeed Obama gets under way, the budget is especially political. It’s also a reaction to the blowout of last November’s midterms, when Republicans won control of the Senate and built a larger majority in the House. Just as Obama appeared ebullient, even liberated, in his recent State of the Union address, so too is his budget almost a declaration of independence.
“The president is not running for reelection, so he’s a little freer to propose what he wants,” says Stan Collender, a budget expert and executive vice president at Qorvis MSL Group. “Since he’s proposing it to a Republican Congress and it’s dead before type-setting, he’s also free, because he doesn’t need to come up with something Democrats will accept.”
The budget is also a campaign document. Not only does it set the table for Hillary Rodham Clinton, strongly favored to win the 2016 Democratic presidential nomination, it also affects the party’s bid to retake the Senate and win back House seats. Whether former Secretary of State Clinton, known as more of a centrist, wants to move so far to the left is another matter. But for now, Obama may have at least mollified the restive liberal base of the Democratic Party.
And there is plenty in Obama’s budget for liberals to cheer about, including free community college (costing $60 billion over 10 years) and a six-year, $478 billion program to repair the nation’s roads, bridges, airports, and other infrastructure. To pay for his college plan, Obama would change how inherited wealth is taxed. Money for the infrastructure plan would come from a one-time 14 percent tax on corporate wealth repatriated from overseas.
Obama also proposes a 19 percent minimum tax rate on corporate profits earned overseas, as part of a larger overhaul of taxes that would take the corporate rate down from 35 percent to 28 percent, and 25 percent for manufacturers.
An overhaul of the entire tax code has long been on Washington’s agenda, but amid partisan gridlock, the process hasn’t gotten off the ground. Rep. Paul Ryan (R) of Wisconsin, the new chairman of the House Ways and Means Committee, which handles taxation, signaled on Sunday that he’s open to working on tax reform with Obama, but warned it will be difficult.
"We want to work with this administration to see if we can find common ground ... and we want to exhaust that possibility and if and when that possibility is exhausted, then we will put out what we think ought to be done," Congressman Ryan said Sunday on NBC’s “Meet the Press.”
"We haven't done tax reform since 1986, because it is just that hard,” he added.
What about the deficit?
Other elements of Obama’s budget were telegraphed in advance. In calling for an end to the sequester, Obama proposed a 7 percent hike in discretionary spending for both domestic and defense spending by roughly equal amounts. Domestic non-entitlement spending would go up $37 billion over the sequester caps to $530 billion; defense spending would rise by $38 billion to $561 billion.
The rest of the budget is consumed by nondiscretionary spending: entitlements such as Social Security, Medicare, and Medicaid, plus interest on the debt.
Obama used to speak regularly about the perils of deficits, and the ever-rising federal debt, which is the cumulative total of annual deficits. In 2010, he appointed a panel, the Simpson-Bowles commission, to come up with proposals for tackling the nation’s unsustainable fiscal path. The Budget Control Act of 2011 did bring spending down, via sequestration, but now both parties are ready to move away from that technique.
Some economists argue that deficits and debt are sustainable, as long as they remain at a reasonable percentage of the size of the US economy. But deficit hawks are as alarmed as ever.
“Entitlement reform – the most critical piece of fixing our fiscal situation – is the disappearing story of the upcoming budget cycle,” says Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “The debt levels are still quite scary, and yet we’re about to see a budget that no longer even aspires to get control of the debt.”