A New Era of Fiscal Responsibility?

President Obama’s first budget was called “A New Era of Responsibility.” Back then,  the president promised that he would cut the deficit to $912 billion in 2011 and to $581 billion by 2012.  But as this chart shows, this administration hasn’t been very good at keeping its promises about deficit reduction: The blue line is what the president promised would happen with the deficit when he issued his first budget, and the red line is what he says will happen now.

Based on the president’s FY2012 budget released yesterday,  the deficits in 2011 and 2012 will be twice the size promised. In FY2011, the deficit won’t be $912 billion but $1.6 trillion. In FY2012, the deficit won’t be $581 but it is now expected to be $1.1 trillion. 

The problem with this budget is that, like the previous ones, it grounds most of its deficit reduction in revenue increases. In this case, spending would go down by $90 billion and revenue would increase by $453 billion between this year and next year. 

This is tricky. The president doesn’t have much control over how people react to tax increases. He can’t stop them from working less, hiding assets, hiring fewer employees, or sitting on their capital instead of investing it. Counting mainly on tax revenue increase to reduce the deficit is not only unlikely; it is sure to backfire, since tax increases make the economy less likely to bounce back and grow.

What’s more, the president’s growth projections and unemployment rates going forward are also unlikely to materialize. Table S-13 in the summary tables shows that the president’s budget numbers are based on the assumption that the economy will grow, in real terms, 3.6 percent in 2012 and 4.4 percent in 2013 — well above most private and governmental projections. Also, his budget assumes that unemployment falls to 8.6 percent in 2012 and 7.5 percent in 2013. These two assumptions not only allow the president to pencil in more revenue but also less spending in the form of unemployment benefits.

Now, let’s imagine that the president’s growth projections and revenue projections materialize. We are still left with a $1.1 trillion deficit in 2012 and with a cumulative $7.2 trillion deficit over ten years. That’s $7.2 trillion that the federal government will have to borrow in the best case scenario. And that explains why the debt held by the public is set to double in the next ten year from $9 trillion in 2010 to over $18 trillion in 2020.

Overall, this budget is unrealistic at best and does not take us a step closer to addressing our short- and long-term budget crisis. As Dan Foster over at National Review Online rightly notes: “The name of the game is entitlement reform, and the rules are simple: save the entitlements, save the world. Ignore them, and we’re Greece with better plumbing.”

Yet, it wouldn’t be that hard to balance the budget without raising taxes. Nick Gillespie and I have a piece in this month’s issue of Reason magazine called “The 19 Percent Solution,” in which we show that limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to GDP. It’s basically a solution that cuts projected spending growth gradually over ten years. Anyone who claims that it would be too painful to cut spending that hasn’t yet happened really isn’t serious.