[Updated Feb 14 2011] President Obama has officially released his administration’ $3.7 trillion fiscal budget blueprint for 2012, which will result in a $1.65 trillion deficit (10.9% of GDP) in the current fiscal year – the largest dollar amount in U.S. history. With cutting the federal deficit a big focus, the proposed budget would trim or terminate more than 200 federal programs next year. To promote the other key agenda item – jobs and economic growth – the President has proposed making key investments in education, transportation, infrastructure, clean energy, innovation and research.
Cutting the Debt
To bring down the federal deficit over 10 years, the president is proposing $3.73 trillion in spending in 2012, as “part of a plan that includes budget cuts and tax increases,” reports the Wall Street Journal. Two-thirds of the savings will come from spending cuts and one-third from tax increases. He would increase taxes on the wealthy by limiting the value of their itemized deductions and by allowing the recently extended George W. Bush-era tax breaks to expire in 2012. He would end subsidies for oil and gas companies, and would eliminate certain tax breaks for corporations that do business overseas. And he assumes that Congress will develop a plan to pay for a $556 billion transportation bill, a measure traditionally funded by increasing the federal tax on gasoline.
Still, annual deficits through fiscal year 2021 will add a combined $7.2 trillion to the federal debt, Obama’s budget shows – even after allowing for $1.1 trillion in deficit-reducing spending cuts and tax increases that the president proposes over the 10-year period. As he acknowledges, after 2021, an aging population and rising medical costs will drive deficits again to unsustainable heights.
Future Investments in Education and Research
The president’s budget calls for targeted investments that would increase funding for energy and medical research, expand the tax credit for corporate research and development, pay to train 100,000 new science and math teachers, and fund a wireless network that would bring high-speed Internet access to 98 percent of Americans. The budget calls for $148 billion in overall spending on research and development, which includes $32 billion in biomedical research at the National Institutes of Health. It would create 20 new Economic Growth Zones, providing tax incentives meant to attract investors and employers in hard-hit economic areas.
Medicare, Medicaid and Social Security
The budget does not directly tackle the biggest government spending programs – Medicare, Medicaid and, to a lesser extent, Social Security — whose growing costs are driving projections of unsustainable long-term debt. But President Obama does propose to save $62 billion from Medicare and Medicaid by squeezing care-providers’ reimbursements and expanding federal health programs’ use of generic drugs.
Alternative Minimum Tax Offest
The proposed budget also seeks to prevent many middle-class Americans from being subjected to the Alternative Minimum Tax (AMT), which would raise their tax bills, for three years starting in fiscal 2012. To cover the cost, the administration would put new limits on the ability of the wealthiest earners to utilize tax deductions to lower their tax burden, among them deductions for charitable contributions and mortgage interest.
[Updated following 2011 state of the union (SOTU) speech in which the President outlined initiatives in five areas: deficit reduction; new innovation and green energy; teaching; infrastructure; and a more efficient federal bureaucracy]
President Obama is scheduled to release his fiscal 2012 budget in February following a very fiscally active 2010. The president’s budget does not have the force of law and mainly functions as a political and symbolic statement of his priorities and an assessment of the economic outlook for the coming year. Like his 2011 budget Congress has to review/approve the majority of proposals and in a number of cases they do not get passed. Case in point, the making work pay credit extension for 2011 and 2012, which was instead replaced by the 2% payroll tax cut.
So what might the president outline in the 2012 budget proposal? Here are some of the big ticket items that may be included:
- Deficit reduction initiatives. With the national debt and its reduction at the forefront of political discussion, both parties have pledged to reduce the deficit that is running at more than $1 trillion a year (and adding to the growing national debt). The President is going to likely include a number of deficit reduction measures in his budget that include extending federal pay freezes (see below), government procurement and a five-year freeze on defense spending and perhaps even some tax increases on the wealthy. He will also allude to various health care savings and cost impacts in 2012 and beyond. Look for the Republicans to provide their own options to reduce the deficit.
- Reorganization of government sponsored entities (GSE), Freddie Mac and Fannie Mae. Many associate the bailouts of the now government controlled GSEs as the nadir of the global economic crisis. The administration has promised to lay out a plan for the the future of these companies, following months of industry discussion and potential solutions/impacts. However given the tentative state of the housing market and economy it is unlikely that the budget will contain anything drastic. More likely it will contain a framework for the future of the housing market and what role the GSEs will play, with a likely long term option to spin out the “good” mortgage assets to the private sector, while keeping the “bad” assets and low income mortgage originations within a merged entity.
- Reshaping the US [Corporate] Income tax code. The budget provisions are also expected to launch broader debates about reshaping the U.S. corporate tax code to make it simpler, make business regulations less onerous and to bring in more revenue. This could include items like consolidating the tax code into three individual rates and lowering the corporate rate to encourage business’ to hire. The president decided to pass on tackling the political charged and complex individual tax code prior to his re-election campaign. While tax reform will take much longer than a year and much deliberation in Congress, the President may use the 2012 budget to get the ball rolling by suggesting some initial reforms.
- Social Security reform. It also is likely to refer to changes the administration says need to be made to Social Security to secure the system’s long-term solvency as the nation’s population grows older. The budget may put in provisions to extend the retirement age to 68 (by 2050) and to increase the social security wage base (so that higher income earners contribute more). More immediately the President may propose a 2011 $250 SSI check for senior citizen who have seen no COLA adjustment to their payments in the last three years.
- Cut Postal delivery from six days to five days, saving the government $8 billion per year in assistance payments. The USPS is meant to be self-funded, but has had to borrow heavily from the federal government over the last few years. Opponents of this move say that it will hinder business and cost thousands of jobs.
- Continued freeze of federal pay scales. The president is expected to continue the pay freeze for government workers paid on the general schedule (GS) salary scale. This is expected to provide $28 billion in cumulative savings over the next five years, and more than $60 billion over the next 10 years.
- New investments in education and innovation. While new initiatives in the budget will be mainly focused on cost cutting measures, there will be some new spending proposals. Likely Obama’s 2012 budget will announce new programs to promote innovation (though research and development) by offering tax breaks and government funding of green energy initiatives. Education is also an important topic for the President, particularly in the backdrop of the failing education system in America relative to the world. In his SOTU speech, he called on the education system to prepare over 100,000 new math, science and engineering teachers to help future generations compete on a global scale.
What do you the budget should include, and perhaps more importantly what should the President and Congress be thinking about from a financial and economic perspective? Have you say in the comment section below. I will provide more details and updates on the 2012 budget when more details are made available (around mid to late February), and you can subscribe (free) via Email or RSS to get notified of the latest news.