THE BASIS POINT

Roubini On Obama’s Budget

 

Here’s Nouriel Roubini’s quick take on Obama’s budget. The full report is here (subscription required):

The Obama administration released its FY2011 budget, which forecasts fiscal deficits of US$1.55 trillion (10.6% of GDP) and US$1.3 trillion (8.3% of GDP) for FY2010 and FY2011 respectively. To support economic recovery in the near term, the administration plans to increase spending on several stimulus measures: extending unemployment benefits and health-care subsidies for unemployed workers, providing tax and credit incentives for small businesses to invest and hire workers, extending payroll tax cuts for the middle class and increasing funding for states, infrastructure and transportation. Meanwhile, the administration plans to begin to reduce the fiscal deficit in 2012 and bring it below 4.0% of GDP by 2014 by adopting fiscal consolidation measures and reducing the primary deficit through raising taxes on high-income households and investors and cutting spending on health care and discretionary programs.

These proposals fall short of aggressive fiscal reforms, and the fiscal deficit is likely to remain near US$1 trillion and exceed 5.0% of GDP over the next decade (and trend higher thereafter). Near-term spending on fiscal stimulus and defense will remain high at least until 2011, as Obama’s proposed three-year freeze on discretionary spending excludes defense and entitlements. A sluggish and jobless economic recovery and weaknesses in the financial and household sectors will keep revenues subdued and constrain tax hikes. Rather than yielding savings, as projected by Congress and the administration, the health-care reform legislation will burden the fiscal deficit over the next decade. Health-care mandates and subsidies will raise government spending, while cost savings from the proposed reforms will be small and accrue only in the longer term. The elimination of the “public option” might reduce fiscal costs, but the lack of it will keep insurance premiums high.

Obama simply lacks the political support to implement aggressive fiscal reforms. The Senate recently voted against Obama’s proposals on spending freezes and the establishment of a fiscal commission, whose role would be to send fiscal reform legislation to Congress that would have to be voted on or thrown out without the possibility of amendments. Moreover, if policymakers extend the 2001 and 2003 tax cuts beyond 2011, when they are scheduled to expire, the impact on the fiscal deficit and U.S. fiscal credibility would be immense. Washington has not signaled strong support for wider tax reforms, such as introducing a value-added tax (VAT).

Despite the ticking fiscal bomb, mid-term and presidential elections in November 2010 and 2012 respectively will further constrain political will to undertake necessary reforms. With sub-par economic recovery and an unemployment rate above 9.0% forecast for 2011-12, the Democrats, grappling to maintain power, are unlikely to approve spending cuts, while the Republicans, seeking to revive their prominence, will be unyielding on tax hikes. Even if Obama manages to establish a fiscal commission by executive order, Congress will be wont to reject any radical fiscal reform proposals.

 

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Comments [ 4 ]
  1. thewordcount says:

    more and more likely that obama = one term president.

  2. that would be unfortunate.

  3. why doesn't he listen to Roubini or Krugman? <bangs head against wall>

  4. Judging by his performance at the GOP event earlier this week (or was it last week?), Obama listens to and understands all advice and proposals. But short term election cycles don't correspond to longer-term economic policy cycles. Opposing parties can usually stir up enough short-term hysteria during elections to oust an incumbent with a long-term plan. It's a shame.

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