First Thoughts on the Budget

by Veronique de Rugy

Forget about the rhetoric, look at the numbers.

First, there’s the $1.6 trillion deficit. That figure is the same as the entire budget of the United States in FY1998 (FY1986 in real terms, which is interesting considering the tendency to compare Obama with Reagan). This deficit will supposedly be reduced to $1.1 trillion in FY2012, but that’s probably wishful thinking. As this chart shows, this administration hasn’t been very good at keeping its promises about deficit reduction: The blue line is what the president promised would happen with the deficit when he issued his first budget, and the red line is what he says will happen now.

In Obama’s first budget (which was called “A New Era of Responsibility”), the president promised that he would cut the deficit to $912 billion in 2011 and to $581 billion by 2012. The reality is a deficit twice that size for both years. Why should we trust the president this time around?

The problem with this budget is that, like the previous one, it grounds most of its deficit reduction in revenue increases. In this case, spending would go down by $90 billion and revenue would increase by $453 billion between this year and next year. The Washington Post this morning, reported on the administration’s eagerness to increase tax revenue:

. . . Obama also would rely heavily on new taxes, to a degree unacknowledged by administration officials in recent days. His budget request calls for well over $1.6 trillion in fresh revenue over the next decade, much of it through higher taxes on the wealthy and businesses.

That’s a risky bet, considering that the president doesn’t have much control over how people react to tax increases. He can’t stop taxpayers from working less, hiding assets, hiring fewer employees, or sitting on their capital instead of investing it. It’s as if I were to continue to spend gigantic amounts of money while in the red just because I think I can force my boss to give me a 20 percent raise — even though my performance last year was relatively bad. This is not only unlikely; it is sure to backfire, since tax increases make the economy less likely to bounce back and grow.

Speaking of economic growth, the president’s growth projections and unemployment rates going forward may also be wishful thinking. Table S-13 in the summary tables shows that the president’s budget numbers are based on the assumption that the economy will grow, in real terms, 3.6 percent in 2012 and 4.4 percent in 2013 — well above most private and governmental projections. Also, his budget assumes that unemployment falls to 8.6 percent in 2012 and 7.5 percent in 2013.

Overall, this budget is unrealistic at best and does not take us a step closer to addressing our short- and long-term budget crisis. As Dan Foster rightly notes today: “The name of the game is entitlement reform, and the rules are simple: save the entitlements, save the world. Ignore them, and we’re Greece with better plumbing.”

It wouldn’t be that hard to balance the budget without raising taxes. Nick Gillespie and I have a piece in this month’s issue of Reason magazine called “The 19 Percent Solution,” in which we show that limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to GDP. It’s basically a solution that cuts projected spending growth gradually over ten years. Anyone who claims that it would be too painful to cut spending that hasn’t yet happened really isn’t serious. While the cuts we propose are spread across the board, lawmakers are free to cut spending the way they want, including using this money for entitlement reform.