In the run-up to yesterday’s release of the 2014 budget, the Obama administration worked hard to create the perception in the media that the president is making a sincere move toward the political center. We are told his budget has as its starting point the final offer the president made to House Speaker John Boehner during fiscal cliff talks in December 2012.
But if this is what the president was offering, the Speaker was absolutely right to reject it then, and he would be right to reject it now too.
To sum it up, the president’s 2014 budget would result in massive tax and debt increases over the next decade, with no serious entitlement reform. The ten-year tax hike is $1 trillion, on top of the $0.6 trillion enacted in January and $1 trillion in Obamacare. But even with massive new taxes, the debt would still rise to $19 trillion in 2023, up from $5.8 trillion at the end of 2008. That’s not the basis for striking any kind of deal with the GOP.
On entitlements, the president has embraced the so-called “chained CPI” measure of inflation. If adopted, it would modestly slow down Social Security spending growth and raise income taxes too, because the thresholds for the tax brackets would rise more slowly in coming years. This may be a relatively innocuous way to slightly narrow future budget deficits, but significant reform it is not. At best, it is a modest adjustment to the entitlement status quo.
On health care, the president is wedded to a vision of cost control that is flawed and should be thoroughly rejected. With the exception of another modest proposal to raise premiums on upper-income seniors, the president’s Medicare suggestions are a series of refinements to the program’s flawed regulated pricing schemes.
Among other things, the budget would cut payments to nursing homes and rehabilitation hospitals. These kinds of payment cuts have been tried many times in the past and haven’t solved the problem because they do not address the fundamentally flawed financial incentives embedded in the program. What’s needed in health care is the discipline of a functioning marketplace.
Adopting the president’s budget would represent a huge economic gamble because it does not seriously reduce the risks of a debt crisis emerging in the next several years. Using the president’s own numbers, U.S. government debt will hold at 73 percent of GDP in 2023. That’s very high by historical standards, and it will only be that low with the president’s policies if the economy performs miraculously.
For instance, the budget assumes real GDP growth of 3.7 percent, unemployment of just 6.2 percent, and interest rates on ten-year Treasury notes of 3.7 percent in 2016. It also assumes inflation will hold steady at 2.2 percent in perpetuity.
If any one of these assumptions is overly optimistic (and there’s good reason to think all of them are), then the budget outlook will be far worse than advertised. In which case, the United States would be heading toward a fiscal crisis of some sort, with the potential to do serious damage to the economy. That’s a threat that Congress needs to take far more seriously than the president apparently does.
James C. Capretta is a senior fellow at the Ethics and Public Policy Center.