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In the Nation's Interest

First Reactions to the Budget

President Obama's budget for fiscal year 2010 (beginning October 1, 2009) was released on February 26, 2009. Technically, the budget was due on the first Monday in February, but such a quick turnaround for a new President, especially one taking office from a predecessor of the other party, is inconceivable. For the same reason of timing, the new document is only a summary of the usual annual budget submission. Further detail will be forthcoming, probably at some time in April.

Here is a brief overview of the document released today.

The bottom line. As the President committed during his "Fiscal Responsibility Summit," the budget presents a ten-year outlook, including projected costs for the war effort, and reflecting the price of year-by-year indexation of the troublesome individual alternative minimum tax (AMT).

The budget begins with a fiscal year 2009 projected deficit, assuming enactment of the President's proposals, of $1.752 trillion, or 12.3 percent of the GDP. Both of these figures are post-World War II records by wide margins. After the presentation of CBO's baseline (that is, current law, without new proposals - and released before the enactment of the stimulus bill) budget deficit of $1.186 trillion, these new deficit figures are no surprise.

The President proposes policies to bring the deficit down to $533 billion, or 3.0 percent of GDP, by fiscal year 2013. The deficit then remains at approximately three percent of the GDP for each successive year through the end of the ten-year budget window in 2019.

As ugly as the deficit picture may be, the outlook for the accumulated public debt is even uglier. The debt held by the public, which ended fiscal year 2008 at $5.8 trillion, is swelled by the large deficits to grow to $11.5 trillion by the end of 2013, and $15.4 trillion by 2019. Relative to the economy, the debt of 40.8 percent of GDP at the end or 2008 grows to 65.8 percent by 2013, and 67.2 percent by 2019. In other words, pulling the deficits back to about three percent of the GDP is just barely what is necessary to stabilize the debt as a share of the economy.

The debt grows by more than the amount of the deficit in the early years because of the capital provided by the federal government for stabilization of financial institutions through programs such as the Troubled Asset Relief Program (TARP). Because these programs purchase assets, the amounts spent are not considered to be outlays, and so do not add dollar-for-dollar to the measured deficit. The deficit includes only a priori estimated losses under these programs, and the measured deficit will be adjusted for future years to correct estimation errors. (The estimates for these programs are very similar between the President's budget and the outlook of the Congressional Budget Office. The accounting for the TARP and like programs is conceptually the same. The budget estimates a $247 billion cost for the TARP, which implicitly suggests expected losses of about one-third. Although the two agencies' approaches to the federal rescue of Fannie Mae and Freddie Mac are conceptually quite different, by coincidence they work out to be numerically similar.)

Overall background and risks to the estimates. One glaring, central risk to the budget's projections is the economic outlook. The budget assumes a weak 2009 (a decline of real GDP of 1.2 percent), but not so bad as that envisioned by the Congressional Budget Office (2.2 percent) or by the Blue Chip compilation of the expectations of private economic forecasters (an average across forecasters of 1.9 percent). Then, in 2010, the Administration projects a quicker turnaround (3.2 percent growth) than do the other economists (1.5 percent by CBO; 2.1 percent by the Blue Chip average). With the economic outlook appearing more troubling by the day, the nation can only hope that this forecast proves accurate.

The Administration's policy choices raise further implicit risks. On the one hand, the Administration should be commended in that its major initiatives are proposed to be paid for. For example, the budget proposes to make permanent the "Making Work Pay" tax credit that was enacted for two years in the stimulus bill; but it proposes that extending the tax credit be contingent to enactment of a "cap-and-trade" program for carbon emissions, the proceeds of which roughly match the cost of the tax credit. As another example, the budget creates a ten-year, $634 billion "reserve fund" to finance health care reform. But on the other hand, these proposals create the risk that the Congress could enact the spending parts of these proposals without the savings. This concern might be heightened by the rather adventurous nature of the proposed savings. For example, the cap-and-trade program would require that current emitters of carbon buy permits at auction, whereas more politically palatable versions of the same proposal would give permits to current emitters at no cost. Similarly, the offsets for the health care reform include controversial provider cuts in Medicare and Medicaid, and an equally aggressive income-tax increase, reducing the value of itemized deductions for top-bracket taxpayers.

The Administration proposes that the highest individual income tax rate go back to the pre-2001 level, and that the estate tax continue at its 2009 rates and credit levels rather than expire as under current law. But on the other hand, the budget would allow permanent indexation of the AMT without offset. This step probably reflects political reality; the likelihood that the Congress would either allow the AMT to take full effect, or enact offsets for the massive cost of its relief, is by all accounts extremely low. (The budget also would make permanent without offset the research and experimentation (R&E) tax credit, which has been extended year by year in a recurring legislative drama. That step is another acknowledgement of political reality, and arguably makes the budget outlook more honest.) The Administration also proposes making permanent expansions of the earned income tax credit, the refundability of the child tax credit, and the American Opportunity Tax Credit for college costs, all of which were enacted for two years in the stimulus bill.

In sum, the budget proposes bold steps, many of them tax increases, that would fund its new initiatives. The risk is that the initiatives and the offsets both would fail, or that the initiatives might be passed without the offsets. Of course, the President retains his veto authority, and so could stop a Congress that wanted to enact new programs without paying for them; but that could halt the President's own chosen signature initiatives.

There is, of course, further detail in the budget document on levels of existing programs and on the President's other proposals. For a quick summary of the new budget, however, we will restrict this review to the presentation on health care.

Health care reform. CED retains a special interest in the President's proposal to enact health reform this year. The budget document released today raises a procedural dilemma. On the one hand, CED and many others want to see a proposal for the transformative structural change that is crucial for the sustainability of the health care sector, and for coverage of all Americans. On the other hand, political realists have said persuasively that the President cannot dictate a specific proposal to the Congress, but rather must give the legislature a significant role in this vital and sensitive effort. Clearly, at this stage of the process, the budget could not meet both of these conditions simultaneously; and thus there is no detailed blueprint for fundamental change in health care.

As was noted above, the budget does provide a specific list of policy changes to provide $634 billion over ten years to finance a health care reform effort. Because the outlay portion ($316 billion) is focused solely on Medicare and Medicaid, there is only limited leverage there to influence the practice of medicine broadly. In the Administration's new budget document, the discussion of how this money would be used to reform health care is largely limited to the following principles:

  • Protect Families' Financial Health. The plan must reduce the growing premiums and other costs American citizens and businesses pay for health care. People must be protected from bankruptcy due to catastrophic illness.
  • Make Health Coverage Affordable. The plan must reduce high administrative costs, unnecessary tests and services, waste, and other inefficiencies that consume money with no added health benefits.
  • Aim for Universality. The plan must put the United States on a clear path to cover all Americans.
  • Provide Portability of Coverage. People should not be locked into their job just to secure health coverage, and no American should be denied coverage because of preexisting conditions.
  • Guarantee Choice. The plan should provide Americans a choice of health plans and physicians. They should have the option of keeping their employer-based health plan.
  • Invest in Prevention and Wellness. The plan must invest in public health measures proven to reduce cost drivers in our system-such as obesity, sedentary lifestyles, and smoking-as well as guarantee access to proven preventive treatments.
  • Improve Patient Safety and Quality Care. The plan must ensure the implementation of proven patient safety measures and provide incentives for changes in the delivery system to reduce unnecessary variability in patient care. It must support the widespread use of health information technology and the development of data on the effectiveness of medical interventions to improve the quality of care delivered.
  • Maintain Long-Term Fiscal Sustainability. The plan must pay for itself by reducing the level of cost growth, improving productivity, and dedicating additional sources of revenue.

Although these conditions do not go as far as the CED proposal to spell out a fundamental restructuring of the U.S. health care system, they are not inconsistent with our vision. Thus, if people are given choices among multiple health care plans, and those choices are portable, there could be competition among plans and providers such as CED believes is essential. The Administration's principles hold that people "should have the option of keeping their employer-based health plan," but if people have choice and those choices are portable, this principle does not require the continuation of an employer-based system. Furthermore, ongoing research at CED thus far suggests that using the Federal Employees Health Benefits Plan as a base, which we propose, would allow a large majority of private-sector employees to continue the plans that they now have. With respect to information technology and the development of data on effectiveness, the proposal is compatible with the recommendations of CED's Digital Connections Council, which advocated for greater use of electronic health records and improvements in health care research. Therefore, the Administration's broad vision for health care could embrace the CED program of market-based universal health insurance, and CED will continue to advocate our plan, including to the Administration.

Conclusion. The times for the economy and the budget today are as uncertain as was ever the case in more than half a century. In a very quick review, the new Administration's first budget addresses these uncertain times with aggressive, or even risky, policy proposals. The outcome of these proposals hinges greatly on the performance of the economy, and the effect of these proposals (and the already enacted stimulus program, and the financial rescue efforts) on the economy in turn. The stakes are so high that every American must hope that this budget, with the input of the Congress, will succeed.

We will continue to monitor these proposals as they evolve in greater detail through the release of the complete budget documents in about two months.

Commentaries are the views of the authors and do not necessarily represent policies of the Committee for Economic Development.