Business Ethos Blog

Prepare for the Budget Battles

Dr. David Mielke, Retired Dean, College of Business at Eastern Michigan University

 

Dr. David MielkePresident Obama released his budget for the fiscal year 2014 starting October 1st on Wednesday.  It is 2 months late—but I am not sure we can say better late than never.  You may remember that the Senate last year voted unanimously last year to reject his budget.  The new budget is a slightly modified version of his previous budgets that reduces the deficit by raising taxes and trading defense cuts for more domestic spending.  The Senate passed a budget in mid-March for the first time in 4 years.  The House also passed a budget in early March.  Some are saying that the President is trying to bridge the huge differences between the Congressional budgets.  The question is, “What is the Right Thing to do?” if we want to promote faster growth and reduce the deficit.

Let’s look at some of the proposals:

1. Obama’s budget wants to spend $3.78 trillion, which would still be 22.2% of GDP.  In 2008, before the recession we were spending about $1 trillion less at about $2.7 trillion, which was an average of 20% of GDP.  Total annual spending would rise by $2.1 trillion to $5.7 trillion over the next decade, totaling 21.7% of GDP.  The Senate budget spends more with the 2023 budget at 21.9% of GDP.  The House budget reduces spending to 19.1%.

2. President Obama proposes to change the way social security, food stamps and other government benefits are increased by changing to a “chain-weighted CPI”.  As a result social security payment increases will slow—however, he has some exceptions to this and proposes that seniors at the lowest levels continue receiving benefits using the regular CPI.  The other side of this coin is that using the chain CPI will raise more taxes because tax brackets will rise a smaller amount, forcing more tax payers into higher tax rate brackets.  Result, spending cut by about $130 billion over 10 years and $100 billion more in taxes.  The House budget does not include this change and Democrats are already criticizing this change.

3. The President’s budget overturns the sequester budget reductions.  The Senate agrees and the House provides more flexibility to apply the cuts, but maintains the reductions overall.

4. He proposes new spending of $50 billion for public works, more college aid, high speed rail, green energy give-aways, $2 billion more for battery operated cars, manufacturing subsidies, funding for Obama care, job training (on top of the existing 47 federal programs) and of course $77 billion for pre-K schooling.  He will pay for the pre-K schooling by raising the cigarette tax from $1.01 to $1.95.

5. He proposes major tax increases by limiting deductions for high income earners, couples with $250,000 or more and individuals with $200,000 incomes, to 28%.  He would increase  the taxes again on capital gains and dividends to 30%, from 23.8%—recently raised from 15%.  There would also be increased taxes on oil and gas, hedge fund managers and savers, by limiting the lifetime amount for IRA’s and other retirement programs to $3 million.  He also wants to go after estate tax increases.  The Republican budge has no tax increases, the Senate similar to President Obama.

The White House budget proposal is structured in a way that would ramp up spending sharply in the next few years, supposedly to spur job growth, while locking in future spending cuts to lower the deficit.  This would be done in part by rolling back the sequester, replacing it with tax increases and some spending cuts later in the decade.  Many of the cuts would start to kick until 2020 well after President Obama leaves office.  Without a change in policy and allowing thesequester cuts to continue, the deficit for next year would be 3.7% of GDP.  Mr. Obama would take it to 4.4%.  Under his plan debt would continue to rise to 78.2% of GDP in 2014.  As recently as 2008, US debt was 40.5% of GDP.  By the year 2023, Obama’s budget would still crate a deficit of 1.7% of GDP, the Democrats 2.2% and the Republican budget would balance.

What is the “Right Thing to do?”  We need the budget cuts now—no new taxes–and no promise of cuts in the future, kicking the can down the road one more time.  We need a fundamental overhaul of entitlements and the tax code.  We once again have a hodge-podge of disjointed proposals without the leadership to develop a comprehensive plan to solve our debt problem and to spur the economy.  Presidents have historically restrained Congress on spending.  Since 2010, the House has restrained the President.