Goldman's Take On Obama's Latest Budgetary "Promises"
BOTTOM LINE: The president has released a budget proposal that goes beyond his budget proposal for fiscal year (FY) 2012. The most important new items are a “debt trigger” that would result in across-the-board cuts in spending and tax credits/deductions if debt/GDP goals are not reached, additional reduction in defense and non-defense discretionary spending and an endorsement of additional entitlement reductions. In most cases, the proposal outlines savings only at a high level.
Process changes: A new “debt trigger proposal”. The president proposes to reduce the deficit by a cumulative $4 trillion over twelve years (through 2023), though it is not entirely clear what baseline this savings number is relative to. The president also proposes to establish a debt trigger that would enforce across the board cuts in spending and “tax expenditures” if by 2014 “the projected ratio of debt-to-GDP is not stabilized and declining toward the end of the decade.” For example, the current CBO baseline assumes an increase in the debt to GDP ratio from 2018 to 2020 of 75.3 to 76.2, so if this policy were to apply today (rather than 2014 as proposed), it would imply additional fiscal tightening as we understand the proposal.
Discretionary spending: More discretionary cuts reflect recent congressional debate. President Obama’s new proposal would reduce non-defense discretionary spending by an additional $200 billion over ten years compared with the freeze proposed in his FY2012 budget, released in February. To some extent this probably reflects the fact that any freeze over future years would start at a lower level, and thus presumably generates additional cumulative savings. The president indicates that additional savings would also be found in defense discretionary spending; the White House fact sheet identifies $400bn in savings over twelve years (through 2023) beyond the savings from ramping down overseas military operations. Some of this reduction appears to be new, but it isn't clear how much it overlaps with existing proposals to reduce defense spending.
Taxes: Few specifics. The president endorses the concepts behind the fiscal commission’s proposal, namely to reform the tax code and reduce tax expenditures. Note that the fiscal commission recommendations included multiple reform scenarios. He also indicates that increased revenue should make up only one quarter of total budgetary savings (including interest savings), in line with the fiscal commission’s approach. Note that the president's budget in February already assumed expiration of upper-income tax cuts after 2012 as well as a limitation on itemized deduction by higher-income taxpayers; we assume the discussion of those issues in his speech relates to those proposals, as there were
Mandatory spending: Less deficit reduction than the House proposal. President Obama proposes $340bn in savings from additional health reforms over the next ten years. This does not appear to involve the fiscal commission’s recommendations. Instead, it assumes savings from setting an even lower spending growth goal of GDP + 0.5% for the Independent Payment Advisory Board (IPAB) set up under last year’s health reform law, as well as $100bn in Medicaid savings and $200bn in Medicare savings. This is a much lower aggregate defcit reduction amount from this segment of the budget than included in the House Republican budget resolution, which proposes $1.1 trillion in savings compared with the President’s FY2012 budget. The President proposes $360bn in savings through 2023 (i.e. over twelve years) in "other mandatory" spending, compared with the House proposal to reduce spending by $1.8 trillion through 2021 (i.e. over ten years).
Social Security: No near term changes. Like congressional proposals, the president does not propose any near term savings from the Social Security program, though he endorses long-term reform.
The process from here: A major debate over revenue vs. spending levels, with discretionary spending caps still the most likely near-term action. It appears very unlikely that the House of Representatives will be willing to consider a meaningful increase in tax revenues, and although both parties have proposed mandatory spending reduction, the House budget proposal would generate much greater savings in this area. This takes the debate back to discretionary spending, where cuts are likely to be approved this week as part of the FY2011 process, and where it appears likely additional cuts or caps, as well as budget process reforms, will be proposed as part of the upcoming debt limit debate as well as the FY2012 budget process that is now getting underway.
From Goldman Sachs
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