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Obama’s Budget: “New Foundation for Lasting Growth,” or Old-Style Tax Cuts and Military Spending?

President Obama just finished speaking moments ago about his budget, a $3.8 trillion dollar document that will lead to $1.56 trillion in deficits for the coming fiscal year. The long-term outlook gets us back to deficits closer to 4% of GDP. FDL News has obtained this budget overview which includes all relevant statistics.

The budget outline includes the three-year freeze in non-security discretionary spending, but despite that, the deficit remains over $1 trillion dollars even in fiscal year 2012. President Obama explained that unfunded mandates, unfunded wars and tax cuts for the wealthy put the nation on this unsustainable path. However, while President Bush’s tax cuts on the wealthy are allowed to expire, war funding continues to surge in this budget, well above the forecast in Obama’s budget from the previous year, and a sign that the federal commitment to Afghanistan is far from over.

Using again the poor metaphor that “we have to do what families across America are doing,” Obama talked about the priorities in his budget. They include $100 billion for job creation, featuring the small business job creation tax credits, encouragements for energy retrofits and investments in public infrastructure the President has previously cited as the pillars of his job strategy.

He also stressed the need for “a new foundation for lasting growth,” and highlighted investments in clean energy, scientific research, and a 6% increase in funding for the Department of Education, saying that “there is no better anti-poverty program than a world-class education.” Obama plans to remake the No Child Left Behind law to reflect closely his “Race To The Top” funding program, where states receive additional funding based on their commitment to various reform measures like teacher performance evaluations. While changing the apportioning of federal monies, Obama would also eliminate certain Bush-era provisions that rigidly designate failing schools. He would also consolidate 38 Education Department programs into 11, an effort to reform the system.

Overall, the budget does reflect a “cut and invest” strategy (Obama called it “cutting what doesn’t work to make room for what does”), though Obama used some clever rhetoric to talk about these cuts. He said that his budget team found $17 billion in cuts in last year’s budget, and $20 billion this year. However, the first example of a “new” program cut, one that pays states to clean up abandoned mines (even if they don’t end up doing the work), was in last year’s budget as well, only to be trimmed by Western-state members of Congress. So the inclusion of a budget cut does not ensure its approval.

Obama included his student loan reform package, where subsidies to middleman banks to perform student loans are eliminated and the savings plowed into Pell Grants, in the budget (this policy was passed by the House but not the Senate last year). He included his tax on big banks, set to recoup $90 billion in lost TARP money over ten years. And he plans to let the Bush tax cuts for the wealthy expire, along with eliminating $40 billion in tax subsidies for oil companies. Obama also mentioned not continuing “a costly tax cut for hedge fund managers,” though it’s unclear whether this means taxing hedge fund profits as income instead of capital gains.

However, there are a multitude of tax cuts in the budget. The President would make permanent certain Bush tax cuts measures affecting those making less than $250,000 a year. He would also extend his “Making Work Pay” tax cuts from the stimulus ($400 for individuals, $800 for families), eliminate capital gains taxes for small business and add in the other small business tax cuts previously described.

Obama said that, while the Defense Department is exempt from the budget freeze, “it’s not exempt from budget common sense.” The big program that Obama is looking to pick off this year, building on the success of cutting the F-22 last year, is the C-17 transport aircraft. The Pentagon has 180 of these planes and does not want any more, yet Congress continues to slip in funding to build more year after year. Obama will seek to “eliminate this program that does nothing to keep us safe.”

As a supplement to the budget, the Administration will sign an executive order to create a bipartisan fiscal commission, which will recommend a plan specifically to balance the federal budget by 2015, excluding payments on the debt. Leadership has vowed to vote on these recommendations after the midterm elections, in December of this year.

The deficit persists throughout the decade, and while 4% of GDP is more sustainable, Peter Orzsag maintained that health care costs are driving those increases in the out years.

One of the drivers of the surging deficit in the second half of the 10-year budget window is surging healthcare costs. OMB director Orszag said in a Sunday briefing that the only way to change that would be to pass healthcare reform legislation. House and Senate Democratic leaders are trying to work out a compromise from House- and Senate-passed legislation that can be approved by both chambers.

“One of the reason why the administration has been pursuing health reform legislation … is not only that the legislation under discussion reduces the deficit over the next decade, but … it puts in place the infrastructure to allow us to constrain cost growth in the decades thereafter, while improving quality,” Orszag said. “Unless we do that, we will be on an unsustainable long-term fiscal trajectory regardless of what else we do.”

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David Dayen

David Dayen