CNSNews.com - Obama’s Budget Deficit Could be Trillions of Dollars Higher Than CBO’s Outlook, Budget Watchdog Group Says

Obama’s Budget Deficit Could be Trillions of Dollars Higher Than CBO’s Outlook, Budget Watchdog Group Says
Wednesday, February 17, 2010
By Christopher Neefus


Treasury Secretary Timothy Geithner, who appeared before the Senate Finance Committee to explain the president's FY 2011 budget, in early February. (AP photo)
(CNSNews.com) – Republicans railed against the Obama administration last month when the Congressional Budget Office (CBO) predicted a $6 trillion dollar deficit over the next decade. But an analysis by the Committee for a Responsible Federal Budget (CRFB), a taxpayer watchdog group, of President Obama’s proposed budget baseline for fiscal year 2011 points out it actually could spur more like $8.5 trillion in deficits.

Under the president’s budget proposal submitted to Congress, deficits would shrink slowly over much of the next decade, and then would start to grow again.

The deficit peaks at $1.56 trillion in FY 2010, constituting 10.6 percent of GDP); then is projected to drop to $1.27 trillion -- or 8.3 percent of GDP -- in FY 2011; $828 billion (5.1 percent of GDP) in FY 2012 and $727 billion (or 4.2 percent of GDP) in FY 2013. In FY 2016, the deficit begins to grow again in real terms, and as a share of GDP in FY 2019. By FY 2020, the deficit would top $1 trillion.

But the watchdog’s analysis of the Obama budget explains that the White House established a new baseline assumption that would include some provisions from the economic stimulus bill and other tax provisions, causing the further dip into red ink.

“The path we are on is clearly unsustainable,” the group said. “Over 10 years, the president’s budget would result in deficits of $8.5 trillion or 4.5 percent of GDP (Gross Domestic Product). This is a substantial improvement from OMB’s ‘current policy
Baseline’ number of $10.6 trillion, but is far worse than their current law (BEA) baseline deficit of $5.5 trillion, or CBO’s current law baseline estimate of $6.0 trillion,” the CRFB said.

CRFB pointed out that the Obama budget assumes a number of policies will stay in place:

--that the Bush tax cuts of 2001 and 2003 will be continued after their expiration date at the end of 2010,

-- that Congress will continue to act as it does annually to revise the Alternative Minimum Tax rate ($678 billion of which they then allow to expire, for
those making over $250,000 a year), to keep more Americans from being exposed to it, and

-- and notably that increased funding for Pell Grants to college students, put in place by the stimulus bill, will remain.

The CRFB report explains that while, at first blush, new proposals put forth by the administration seem to save money over a decade, the plan actually proves to cost trillions more when compared to what current law really is.

“The budget estimates that the proposals would save $2.1 trillion over ten years relative to its ‘current policy’ baseline, but cost $3.1 trillion relative to a current law baseline,” the report said. “The disparity is the result of a large number of policies the president assumes in his baseline which are not, in fact, consistent with current law.”

Aside from increased Pell grants, which would cost $118 billion, several other policies temporarily put forth in the stimulus bill now make their way into the Obama economic baseline. New extensions to unemployment benefits are included as well as increased Medicaid funding (costing about $370 billion) to prevent a 21 percent reduction in Medicare physician payments for the states, which together add another $84 billion dollars in spending.

In addition, when Treasury Secretary Geithner appeared before the Senate Finance Committee on Feb. 3, he told senators that $100 billion more was tagged to be spent in a new stimulus bill that Congress could pass aimed at job creation.

“What the president’s proposed in the budget,” Geithner said, “is to set aside $100 billion on top of some of the extension of measures in the Recovery Act already approved like the extension of unemployment insurance, and I believe the country can afford that, if we design that use of that package sensibly. That will be a good thing not just for growth but for a long-term fiscal position.”

Legislators from both sides of the aisle have made plain that they do not believe the current fiscal path is sustainable, while Republicans have warned against extending any provisions of the stimulus, which was presumably temporary spending.

Sen. John McCain (R-Ariz.) told CNSNews.com on Jan. 27 that he would support spending cuts to eliminate the $6 trillion deficit projected by the CBO and warned that many lawmakers would balk at the task.

“(T)he reaction to this is going to be, ‘It’s too hard. We can’t do it. It’s too hard. You can’t do it. You can’t do that,’” McCain said.

“To say we can’t do it and it’s too hard neglects the realities of the incredible dramatic increase in spending. Just last year, non-defense discretionary spending increased by 12 percent. It is impossible to keep that up and not destroy our economy,” he told CNSNews.com.

McCain added to reporters, “With this kind of spending, and this kind of debt that we are amassing, with the Chinese owning hundreds of billions of dollars of U.S. Treasuries (Treasury bonds), we can’t pass on to the next generation of Americans a better nation, a more prosperous one than the one than we inherited.”

Sen. Chuck Grassley (R-Iowa), the top Republican on the Finance Committee, told Geithner during his hearing that making stimulus provisions permanent in the new budget was misleading.

“The stimulus bill was sold as a temporary measure to get the nation through tough times, however, to the surprise of very few, Congress is already being asked to extend the temporary tax and spending provisions in the stimulus bill,” Grassley said.

“It’s kind of like we maybe thought that we bought a pet gecko and we ended up with Godzilla,” he told Geithner. “Well, what we want from you is assurance that this won’t be let loose on the American people.

The administration does make several money-saving and revenue-raising proposals in the new budget, including a “financial crisis” tax on banking institutions that used loans from the Troubled Assets Relief Program (TARP); a limit on itemized deductions on income taxes, and a $249 billion freeze on non-defense discretionary spending. The proposals, however, are negated by the deficit spending under current law along with the other newly assumed spending in the Obama administration’s baseline.

Obama said in his State of the Union address that he would also use an executive order to create a debt reduction commission that would make recommendations about other ways to reign in deficit spending and pay down the debt. At the time, he said “I refuse to pass this problem on to another generation of Americans.”

In the hearing, Geithner said there was a “good economic case” for the stimulus extensions and said the budget proposal would “begin to put us back to a responsible, sustainable fiscal path.”