The President’s Budget for FY 2011
February 4, 2010
Summary
The President’s new budget would add over $3 trillion to federal deficits over the next 10 years relative to current law. Just under half of the change would be in the form of lower revenues, while the balance would result from higher spending. As a result, federal debt held by the public would grow to 77 percent of economic output (gross domestic product, or GDP) by the end of this decade, an increase of $11 trillion since the beginning of the current fiscal year.
In the near term, the budget focuses on policies designed to reduce unemployment and strengthen economic growth. Once the economy recovers and the military activities in Iraq and Afghanistan wind down, the budget contains few proposals to address the budget’s worsening outlook. The budget assigns the difficult job of fixing the structural mismatch between spending and taxes to a Fiscal Commission. The Commission would be charged with: balancing the budget in 2015 (excluding interest costs) and “examin[ing] policies to meaningfully improve the long-run fiscal outlook.”
The President’s budget policies would, however, make the Commission’s job more difficult.
- The President’s proposals to renew many tax cuts enacted in 2001, 2003, and 2009 would reduce receipts by $2.8 trillion over the 2011-2020 period.
- The budget counts on $150 billion in deficit reduction over 10 years from health care reform, which it estimates would be left over after new health care benefits and tax subsidies are paid for. A larger portion of such savings and revenues could be used to reduce the budget’s long-term fiscal gap and address Medicare’s financial problems instead of expanding federal health spending.
- As he did last year, the President proposes to compare his budget to a new budget baseline that would include $5.2 trillion in lower revenues and higher spending than the benchmark calculated according to the requirements of the Budget Enforcement Act (BEA). The administration’s current policy baseline includes the cost of expiring tax cuts, inflation adjustment to alternative minimum tax thresholds, and a fix to Medicare physician payment rates would require new legislation to implement. Including those policies in the baseline comparison makes the President’s proposed changes look less harmful from a deficit perspective.
The President’s budget illustrates how difficult it will be to address the serious structural deficits facing our country. The budget proposes a number of tax increases and spending reductions, but leaves deficits well above the Administration’s target of 3 percent of GDP. Over the coming decades, as baby boomers retire and health care costs continue to grow, spending will exceed projected revenues by increasingly larger amounts. According to OMB’s projections, debt held by the public would reach 99 percent of GDP in 2030 and more than double to 218 percent of GDP in 2050. Foreign lenders would be increasingly unlikely to continue to finance federal deficits at low interest rates. The result would be a weaker economy, higher unemployment, higher taxes, higher interest rates, and lower standards of living.
While multi-decade projections are uncertain, the current budget outlook is clearly unsustainable even if no new unexpected demands—such as the recent financial crisis—emerge. The President’s Fiscal Commission, which would report its recommendations after this year’s election, will have to put every component of the budget “on the table.” Those who oppose tax increases should present options to reduce spending sufficiently to close the projected large and growing fiscal gaps. Those who oppose program reductions should present new revenues to finance any related spending requirements. As the President’s long-run projections indicate, the challenge becomes increasingly difficult over time.
Highlights
Determining whether the President’s budget would improve or worsen the budget’s outlook depends on the benchmark chosen:
- Compared to the current policy baseline (which the Administration prefers), the FY 2011 budget would reduce projected deficits by $656 billion over five years and $2.1 trillion over the 10 years. This would be achieved through an increase in projected revenues of $640 billion between 2011 and 2015 and $2 trillion over the 10-year 2011-2020 period, while spending would decrease by $15 billion and $98 billion over the same five- and 10-year time periods.
- Compared to the Budget Enforcement Act baseline (which is defined by the Budget Act), the FY 2011 budget would increase projected deficits by $1.2 trillion from 2011 to 2015 and $3.1 trillion over the 10-year budget projection period. This would result from a reduction of revenues of $729 billion over five years and $1.5 trillion over 10 years, while increasing spending by $478 billion and $1.6 trillion over such periods.
- The President’s new Budget for FY 2011 shows a deficit in 2009 of $1.4 trillion (9.9 percent of GDP). Over the 2011 to 2020 period annual deficits would average 4.5 percent of GDP and total $8.5 trillion. In 2020, the President’s proposed budget anticipates a deficit of 4.2 percent of GDP.
- As proposed, the budget’s policies would double debt held by the public from $9.3 trillion at the end of 2010 to $18.6 trillion at the end of 2020.
- Similar to last year’s Budget, the Administration includes similar policy proposals such as: health insurance reform, increasing the maximum Pell grant awards and climate policy. The President also proposes Temporary Recovery Measures through tax cuts that will worsen the 10-year budget outlook by $47 billion and increase mandatory spending by $45 billion over the 2011-2020 period.
- The Office of Management and Budget (OMB) current policy baseline projection already includes adjustments to reflect policies that have not already been enacted, such as: the extension of the temporary fix to AMT, the continuation of the 2001 and 2003 tax cuts, the prevention of in Medicare physician payments, and adjustments to Pell Grants.
- The President proposes reductions in discretionary and mandatory outlays through program terminations and reductions (120 programs in total will face elimination, reduction or other savings). Some of those spending reductions will count toward the proposed three-year freeze in “non-security” discretionary spending. Revenue proposals include increasing taxes on upper- income taxpayers (married couples making more than $250,000 or single filers making more than $200,000).
Policy proposals include:
- Receipt Proposals
- Tax cuts for families and individuals through EITC, child tax credits, elimination of capital gains taxation for small businesses;
- Eliminations of capital gains taxes for investments in smaller firms;
- For upper-income taxpayers, end the 2001 and 2003 tax cuts, phase-out personal exemptions, limit itemized deductions, and impose a 20 percent tax on capital gains and dividends;
- Close tax loopholes that allow investment managers not to pay income taxes on earnings and ending subsidies on big oil, gas and coal companies;
- Limit the tax rate at which itemized deductions reduce tax liability to 28 percent.
- Mandatory Spending Proposals
- Climate policy;
- Enactment of fees in various programs (agriculture, FCC);
- Make Pell Grant funding mandatory and index maximum awards to the consumer price index plus 1 percent.
- Discretionary Programs
- Freeze in non-security discretionary funding for three years. (“Security” agencies are: the Departments of Defense, Homeland Security, Veterans Affairs, and State; the National Nuclear Security Administration in the Department of Energy; and other international programs. “Non-security “ agencies are everything else.)
- Add $130 billion more in 2010 for “Overseas Contingency Operations” (Iraq and Afghanistan), for a total of $609 billion over 10 years. That amount would be $119 billion less than amounts included in the current policy baseline.
Highlights - Continued
- The budget includes one major budget process reform proposal—statutory pay-as-you go (PAYGO). PAYGO would require that policy proposals to increase entitlement and mandatory spending or to reduce taxes be offset by proposals that would produce at least an equal amount of spending decreases or revenue increases to pay for them. The Administration’s PAYGO would be based upon its adjusted, current policy baseline, which projects that the 10-year deficits that would be $5.2 trillion higher than deficits in the BEA baseline. As a result, many of its proposals, including continue tax cuts for taxpayers making less than $200,000 (individuals) or $250,000 (couples), indexing the alternative minimum tax thresholds for inflation, and adjusting the Medicare payment rate for physicians would not be subject to the PAYGO requirement.
- The budget would not re-impose statutory caps on discretionary spending, which together with PAYGO contributed to the fiscal discipline of the 1990s. Thus the proposed freeze on non-security discretionary spending could not be enforceable through the threat of automatic across-the-board cuts.
- Economic assumptions have a significant impact on projected levels of budget revenue and spending. OMB forecasts stronger economic growth than CBO. In 2010, OMB forecasts 2.7 percent change in real GDP and 3.8 percent in 2011. CBO’s forecast is 2.2 percent in 2010 and 1.9 percent in 2011. OMB projects that growth rates will continue to increase through 2012 and then gradually slow to 2.5 percent—the estimated long-run growth rate—in 2019. OMB is not as optimistic about the jobs picture—it projects that job losses will linger longer than CBO does. In 2012, the Administration’s projects an unemployment rate of 8.2 percent compared with CBO’s projection of 6.2 percent.
