Busch: Ultimate Economic Mixed Metaphor—The Obama Budget
Today, President Obama holds a press conference to discuss the details of his 2011 budget. According to the press release, here are the key facts:
- Overall 2011 Spending: $3.834 trillion.
- 2011 Discretionary Spending: $1.415 trillion.
- 2011 Projected Deficit: $1.267 trillion or 8.3 percent of GDP (down from $1.556 trillion or 10.6 percent of GDP in 2010).
- 10-year Deficit Reduction: $1.2 trillion, excluding war savings.
- Tax Cuts: More than $300 billion in the next 10 years for individuals, families, and businesses.
The White House fact sheet also contains these highlights: "The Budget includes $100 billion for immediate job-creating investments in small business tax cuts, infrastructure, and clean energy. This includes a new Small Business Jobs and Wages Tax Cut to spur small business hiring and wage increases; this will cost $33 billion. Extend for another year the Making Work Pay Tax Credit for 110 million American families. Increase the child care tax break for middle-class families. Eliminate the tax on capital gains from new investments in small business. Extend through 2010 the Recovery Act provision that allows small businesses immediately to expense up to $250,000 of qualified investment."
They are proposing a 3 years spending freeze on non-security discretionary spending to save $250 billion over 10 years; cost cutting of $20 billion, bank tax fee of $90 billion over 10 years, elimination of tax preferences for oil, gas, and coal companies for $40 billion over 10 years; and allow the 2001 and 2003 tax cuts to expire for households making more than $250,000 raising $678 billion over 10 years. This 2011 budget will be the third year in a row of trillion dollar deficits.
The simple figures to understand are these: receipts versus outlays.
In trillions, 2009: 2.105 receipts, 3.518 spending; 2010 2.165 receipts, 3.721 spending; 2011 2.567 receipts, 3.834 spending. Spending increases every year. Today, there are no surpluses and the spending remains high: 5.8% increase in 2010 and 2.9% increase in 2010. Note, the anticipated increase in receipts for 2011: a massive 18.5% increase from taxes.
The longer run projections are for $8.5 trillion in deficits over the next ten years. The public debt will reach $10.5 trillion in FY11, an astounding 68.7 percent of GDP. Even with today's low rates, interest costs would more than quadruple by the end of the decade, reaching $840 billion in 2020, and overall spending will remain well above the historical average at 23.7 percent of GDP by 2020.
When I think of this structure, several phrases come to mind: This isn't rocket surgery. It's rare, but not unusual. We have to run it up the flagpole to see if it floats. It's a classic mixed metaphor.
The Obama budget is doing something now that will incent people to hire workers that in the long run is going to cost them their jobs. It's ironic that the plans are to provide a tax cut to hire workers (Small Business Jobs and Wages) and then a tax hike (2001-2003 Bush cut roll off) to discourage it. Remember, many small businesses are subchapter S and the profits roll straight through to individual tax returns. So when you tax earners over $250k, you hurt small business. Cheap loans (any loans) will help, but incenting people by letting them keep them own money is better for the economy and for job creation.
While the President met and debated Republicans over the weekend, we'll have to wait and see for any breakthroughs for cooperation on the budget. So far, I don't see any carrot at the end of the tunnel.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.