Tuesday, January 29, 2008

Budget Policy in the SOTU

Let's continue with the budget policy theme, but let's also move on from the discussion of the $150 billion of new deficit spending that the House leaders and the President proposed last week. In the text of the State of the Union address, the word "budget" appears only in the following paragraph:

Just as we trust Americans with their own money, we need to earn their trust by spending their tax dollars wisely. Next week, I'll send you a budget that terminates or substantially reduces 151 wasteful or bloated programs, totaling more than $18 billion. The budget that I will submit will keep America on track for a surplus in 2012. American families have to balance their budgets; so should their government.
I had three reactions, none of them particularly favorable.

1) While I'm likely to be pleased at the details of the $18 billion in expenditure reductions, let's not confuse that with significant spending reduction. Total (defense and nondefense) discretionary outlays in 2008 are $1,089 billion. [See Table 3-7 here and keep the file open.] So even if Social Security, Medicare, and Medicaid (the bulk of the mandatory outlays, see Table 3-3 above) are held harmless, this is a reduction of 18/1089 = 1.7%.

2) While I would be happier in 2012 with a surplus than without one, this is another one of those incredibly weak budget targets. (The earlier one was to "cut the deficit in half in 5 years.") First, it includes the Social Security surplus in 2012, projected by CBO to be about $45 billion in that year. (See Tables 4-5 and 3-3 above.) An honest budget--one that would not be "raiding" the Social Security Trust Fund--would exclude the off-budget surplus and have the entitlement programs in long-term balance. Second, the economic forecast on which this projection is based assumes positive annual growth in real GDP between now and then. [See Table 2-4 above.] So if we are experiencing positive economic growth over this period, why is it that only in 2012 do we reach the number zero? Should we not be running surpluses in every year in which growth is above its long-term average? See this earlier post for further discussion of these points.

3) I can't be 100% sure on this one, but it appears from Slide 11 in these slides accompanying CBO Director Peter Orszag's testimony on the budget outlook from January 23 that if modifications to the baseline are made which are consistent with other things the President has said, we don't come anywhere close to budget balance in 2012. The modifications made are: to exented all expiring tax provisions, make reforms to the alternative minimum tax, to assume that the number of military personnel in the war on terrorism falls to 75,000 by 2013, and to assume regular appropriations grow at the rate of nominal GDP. The first one is critical, since the President also insisted that "Unless Congress acts, most of the tax relief we've delivered over the past seven years will be taken away." So the projections for surplus in 2012 are inconsistent with other policy statements the President would has made.

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