Obama’s Budget Balancing Act

CFR

April 13, 2011

Author:	James M. Lindsay, Senior Vice President, Director of Studies, and Maurice R. Greenberg Chair

President Barack Obama's speech today at George Washington University put his marker down in the debate on what the United States needs to do to put its fiscal house in order. His plan has no chance of passing as is, and the president said as much. But it does mean that the long-awaited "adult conversation" about government red ink has begun.

Obama's deficit reduction plan is less ambitious than the one that House Budget Committee Chairman Paul Ryan (R-Wis.) floated earlier this month. The president would slash federal borrowing by $4 trillion over the next twelve years, which is well below the target not just in the Ryan plan but also in the Bowles-Simpson Deficit Commission recommendations.

Obama's plan will draw criticism from all quarters. Republicans adamantly oppose his call for higher taxes. Deficit hawks will argue that tax increases for the wealthy will not be enough and that higher interest rates would wipe out much of Obama's projected savings. Democrats will argue that the budget cuts go too far.

But it is a mistake to read Obama's speech solely as a budget document. Its purpose was primarily political. It kicked off the 2012 presidential campaign by contrasting the competing visions Republicans and Democrats have for America's fiscal challenge. It painted Republicans as reckless and radical in using deficit reduction as a means of "changing the basic social compact in America."

In comparison, Obama's "more balanced approach" envisions that "we live within our means while still investing in our future." This approach recognizes that a desire to cut budgets shouldn't obscure the importance of preserving some types of federal spending. An America that refuses to invest in its future will be a country that is less able to hold its own in an increasingly competitive global economy, argues Obama, citing specifically the spending on energy alternatives and education by other industrialized states such as China, Brazil, and South Korea.

More immediately, though, Obama's speech tried to frame the debate for the impending vote on the national debt ceiling. The U.S. government will hit the debt limit in mid-May, after which time it will be barred by law from borrowing any more money. The White House has abandoned its original hope that Congress will pass a clean bill. House Republicans have made clear that they will not vote for any bill that is not linked to what they see as a credible plan to cut federal spending.

The struggle now is over whose deficit reduction vision wins. Speaker of the House John Boehner (R-Ohio) reiterated today the Republican position that "raising taxes will not be part of" any debt ceiling deal. Obama just as firmly insisted that he will oppose radical changes in Medicare or further extension of the Bush tax cuts.

Both sides will jockey for political advantage over the next several weeks. Neither side will tip its hand on its willingness to compromise on key principles until the last moment, if at all.

The stakes in the debate are high. Default on U.S. debt obligations would cause unimaginable economic harm and derail not just the U.S. economic recovery but global growth more generally. Even the prospect that Washington might not be able to find common ground could roil the markets and have much the same effect.