What the President’s Budget Reveals

Published March 11, 2014


While not every president’s budget is relevant to policymaking, most budgets do say something about the priorities and governing philosophy of the administration putting it together. The Obama administration’s fiscal year 2015 budget is no different in this regard. While it is unlikely to lead to any significant legislation this year, it is nonetheless revealing about what this administration considers important.

As many others have noted, and administration officials have all but admitted, the first priority of the 2015 budget is not to pass anything important in 2014 but to retain Democratic control of the Senate in the November mid-term election. The president himself has said previously that this is his top priority for the year. The budget assembled by his administration quite clearly had this objective in mind when setting priorities. Gone are any (even superficial) attempts to appeal to Republican legislators through serious tax and entitlement reforms, and thus to build the foundation for bipartisan support of significant budgetary legislation. Instead, this budget emphasizes higher levels of spending for liberal priorities and new entitlements, such as preschool education, financed with higher levels of taxation.

According to the administration’s own numbers, the ten-year tax increase in the 2015 budget is $1.8 trillion. This tax hike would come on top of the massive tax hikes already enacted in Obamacare ($1 trillion over ten years, according to theCongressional Budget Office), and in the 2013 tax deal ($630 billion over ten years, according to the White House budget office). Even without a new round of tax increases, President Obama has already pushed federal revenue collection far above the post-World War II norm of about 18 percent of GDP. According to CBO, federal revenue under current law will now reach 20 percent of GDP in the not-too-distant future and continue rising still further due to the bracket creep built into the Obamacare tax hikes. The tax hikes in the 2015 budget would add another one or two percent of GDP to the nation’s annual tax hike when fully implemented.

The 2015 budget also continues the Obama administration’s remarkably persistent efforts to downsize the nation’s military capabilities. The budget proposes to reduce defense spending to 2.3 percent of GDP at the end of the ten year budget window—which would be the lowest level of defense spending in many decades. Medium-term defense funding estimates carry far more significance than other outyear projections in the budget because it often takes many years for national defense policies to be fully implemented. A budget plan that consistently indicates downward pressure in future years will force near-term decisions to cancel weapons systems, downsize force structures, and degrade readiness with curtailment of training. And these decisions will have implications for our military strength immediately – not ten years from now. What is truly remarkable about the Obama budget is that it is pushing forward with a major downsizing of national security capabilities even as world events—see Syria and Ukraine—indicate that this is quite obviously adding substantial new risks to our security interests all around the world.

Beyond tax increases and defense cuts, the other favored mechanism for fiscal consolidation in this, and past, Obama budgets is deeper healthcare price regulation, implemented through Medicare. The 2015 budget proposes $400 billion in ten-year Medicare cuts, focused mainly on the usual assortment of adjustments to the obscure payment regulations governing how providers get paid for taking care of Medicare patients. For instance, the budget proposes to import into a portion of the Medicare drug benefit the price control system governing how Medicaid purchases drugs, supposedly saving $117 billion over a decade. There are also new cuts planned for nursing homes, rehabilitation facilities, durable medical equipment suppliers, and many others.

Some of these cuts might be justified if the goal were to build a better price control regime in a public insurance program. But the lowering of price controls does not constitute real entitlement reform. The federal government has been trying to fix the problems in Medicare through the micromanagement of prices for decades now, and yet Medicare’s problems persist. The root problem in Medicare is the inefficient provision of care. Price controls do not fix that problem. Indeed, instead of leading to more efficient care, price controls can force providers out of the Medicare program altogether. That’s already expected to happen in coming years as the Medicare cuts contained in Obamacare will push payments to hospitals so low that about 15 percent of them will be forced to drop out of the program by decade’s end, according to the government’s own projections. Millions of Medicare enrollees may also be forced out of their Medicare Advantage plans in the coming decade because of the deep Obamacare cuts in that portion of the program. The 2015 budget doubles down on these dubious, Obamacare-like approaches to cost control.

Among the laundry list of Medicare spending reductions contained in the budget is a proposal to increase the planned cuts implemented by the Independent Payment Advisory Board (IPAB). The IPAB is the fifteen member board given authority in Obamacare to hold cost growth down in the Medicare program. In any year in which Medicare spending is expected to exceed the ceiling set in law, IPAB’s recommended cuts will go into effect automatically unless Congress passes alternative savings provisions. This prospect of handing over so much power and authority over to an unelected and unaccountable board of supposed experts has made the IPAB highly controversial—so much so that the administration has yet to submit names to begin filling out the open slots on the board. Yet the budget proposes to lower IPAB’s annual spending growth target in Medicare from GDP plus one percentage point to GDP plus a half of a percentage point every year.

Beyond these three areas—tax hikes, defense cuts, and health care price controls – the Obama budget shows almost no restraint. The portion of the budget that is creating the pressure for cuts and consolidation—entitlement spending—is allowed to skyrocket, even with the Medicare cuts. Total entitlement spending rises from $2.2 trillion in 2014 to nearly $3.9 trillion in 2024, for an average annual growth rate of 5.5 percent. By comparison, the Obama defense budget is essentially held flat for ten years in nominal terms. In real terms (after adjusting for inflation), defense funding in 2024 would be more than $138 billion less than the appropriation request in 2015.

The Obama budget is purposefully a blueprint for unrestrained liberal governance. The president wants to show the electorate what Democrats would do if they had full control of Congress again. That may help with some voters, but it also opens the administration up to substantial criticism. Because a budget predicated on massive tax hikes, deep cuts to defense, and extension of healthcare price controls can easily be described by opponents as a recipe for slower growth, a more dangerous world, and impeded access to care for seniors.

Let the political debates begin.

James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.

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