The Illusion of Fiscal Responsibility

The rhetoric used to promote President Obama’s fiscal year 2015 budget has many believing his proposal is fiscally responsible. His official message to Congress regarding the budget said, “We have cut the deficit in half as a share of the economy, experiencing the fastest period of deficit reduction since the demobilization following World War II.”

The president then goes on to boast that it will take eight more years to bring the deficit below two percent of GDP.

Whenever President Obama speaks about his austerity credentials, he should thank the Great Recession. Just before he came into power, the U.S. budget had its highest deficit since World War II thanks to abnormally low revenues and high spending caused by the poor economy. In light of this, President Obama has only had to propose budgets that are slightly more fiscally sound to create the appearance of improvement.

In reality, the budget deficit is still nowhere near pre-recession levels. In 2007, the budget deficit was 1.1 percent of GDP. In 2013, the deficit was 4.1 percent of GDP, and President Obama’s FY 2015 budget would only bring the deficit down to 3.7 percent of GDP.

Part of the reason deficits remain high is the U.S. economy. It has been troubled by slow GDP growth, in the range of 2.25 percent, resulting in continued high unemployment and low labor-force participation. The president and Congress shoulder the blame for the troubled economy, as well as the budget deficit, because there has not been significant legislative action to boost economic growth.

Not only is the Budget short on spending cuts, it also proposes new spending. For example, the president wants to spend more on government-created manufacturing hubs by creating an additional 45 over the next decade. He also wants to expand the Earned Income Tax Credit by $60 billion over 10 years, and offer universal pre-kindergarten at a cost of $75 billion over 10 years. 

President Obama’s proposed budget does not represent true reform. Real budget reform would cut and simplify taxes while reforming entitlements to be more sustainable. The president’s budget could also propose streamlining burdensome regulations to encourage economic growth without adding to the deficit. These measures would decrease the deficit as a percent of GDP, boost the economy, and encourage job creation.