Obama's Budget: Cuts and Investment

Obama budget announcement - AP Carolyn Kaster - banner.jpg

President Obama speaks about his budget proposal at Parkville Middle School and Center for Technology in Baltimore. credit: AP Photo/Caroly Caster

President Obama's 2012 budget, out this morning, calls for $1.1 trillion in deficit reduction over the next 10 years, with roughly two-thirds drawn from spending cuts and another third from revenue increases.

Under the White House plan, the deficit would peak this year at $1.6 trillion, or 10.9 percent of GDP -- slightly higher than recent congressional projections. The deficit would decline to $1.1 trillion in 2012, or 7 percent of GDP, and stabilize at about 3 percent of GDP by 2015. But then it would start to creep back up in 2021, as retiring baby-boomers drive up outlays for Medicare and Social Security.

White House officials say they are still on track to meet the president's target of halving the deficit that he faced upon taking office. But they admit that last year's goal of reaching a "primary" balance -- matching revenues to spending, except for interest payments on the debt -- will be postponed from 2015 to 2017.

The $3.7 trillion budget blueprint freezes domestic discretionary spending over five years and institutes an inflation-adjusted freeze on defense spending for the same period.

In a notable concession to fiscal honesty, the budget also lays out a plan for paying some big costs that Washington has glossed over for years.

It proposes to pay for the annual "doc fix" -- Congress's avoidance of Medicare's sustainable growth rate -- with $62 billion in health care savings.  To patch the alternative minimum tax for three years, which would hit millions of middle-class income earners if Congress doesn't act, Obama's plan would reduce the value of tax deductions for high-income Americans back to Reagan-era levels.

Although the budget includes 200 terminations, reductions, and savings, few of those cuts would reduce total spending because most would be plowed back into targeted investments in education, research and development, and infrastructure. The plan maintains an increase in the maximum size of the Pell Grant by cutting $100 billion from other expansions in the program, and it pays for a national wireless broadband network with revenues from auctioning additional segments of the radio spectrum.

The budget does not contain a specific program to address long-term entitlement reform, though it does build on the administration's health care cost controls. It also endorses a deficit-neutral reform of the corporate tax code, and it lays out principles for a Social Security overhaul.

Whether it ends up defining the fiscal debate or not, the president's budget at least stands as an answer to House Republicans' clamoring for spending cuts.

Fielding questions before the official release of the plan, Office of Management and Budget Director Jacob Lew defended the White House's treatment of entitlement spending, saying the budget had forced "tough tradeoffs."

Lew, pressed during an interview on MSNBC to point out substantive provisions in the blueprint, said the budget marks a first step toward real reform of entitlement and defense spending -- the primary drivers of the nation's long-term debt problem.

"Our budget actually makes cuts in many of those areas," Lew said. "We reduce defense spending by $78 billion over the next five years. We do have savings in health programs."

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Tim Fernholz is a reporter at Quartz.

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