White House

Why Obama's budget will be more DOA than ever

The era of the "grand bargain" is over.

There will be no more significant action in Washington this year—and perhaps for several years to come—on reducing long-term deficits or reforming Social Security and Medicare.

The end will officially come on March 5, when President Barack Obama releases his 2015 budget request that will drop a proposal the president previously supported to reduce the rate at which Social Security benefits increase.

Jewel Samad | AFP | Getty Images

Obama had offered so-called "chained CPI" as a concession to Republicans to get them to agree on a multitrillion deficit reduction package that would also include higher taxes on top earners.

But now that there is a budget agreement in place for 2014 and the debt limit is off the table until March 2015, there are no longer any forcing mechanisms to get the two parties together to hammer out a long-term agreement. As centrist group Third Way put it on Thursday, it made sense for Obama to take chained CPI off the table "because there is no more table."

Instead, the Obama budget will include higher taxes through "loophole closings"—such as raising the levy on carried interest—to support tens of billions in proposed new spending on education, infrastructure and other items.

Of course, the tax hikes and spending initiatives aren't going anywhere in the GOP-controlled House, especially as the midterm elections approach.

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So the president's budget will be more "dead on arrival" than usual on Capitol Hill.

It will serve mainly as a campaign manifesto for the midterms, in which Democrats believe they have the higher ground in some key battleground states with their pitch of no more austerity spending cuts and a boost in the minimum wage to $10.10.

I sat down with top White House adviser Gene Sperling in Washington this week as he prepares to leave the administration, and he said he thought the administration's shift on fiscal policy would bring political benefits.

And he rejected the recent Congressional Budget Office report suggesting a minimum wage hike to $10.10 would cost around 500,000 jobs.

"A higher minimum wage creates greater employee retention, morale and productivity," Sperling said in the interview. "We are operating on the idea that someone who works full time has a level of dignity to not have to raise their children in poverty, and that is something everyone can agree on."

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Republicans, of course, seized on the CBO report as proof that hiking the minimum wage is a job killer. And they wasted no time ripping reports of Obama's new budget request.

"This reaffirms what has become all too apparent: The president has no interest in doing anything, even modest, to address our looming debt crisis," Brendan Buck, spokesman for House Speaker John Boehner, said in a statement. "With three years left in office, it seems the president is already throwing in the towel."

Sperling and other administration officials argue that Obama was ready to make a big deal with Boehner, including chained CPI, in 2011 but that Boehner balked at the last minute, unable to bring his tea party colleagues along. Boehner and other Republicans claim it was the White House that jacked up its revenue request to $1 trillion over 10 years at the last minute, killing the grand bargain.

What's clear now is that the sharp reduction in short-term deficits and the defusing of the debt ceiling bomb mean there is little pressure to restart any big deal talks. The Congressional Budget Office estimates the 2014 deficit at $514 billion, still a high number but well below the trillion-plus-dollar deficits of the last several years.

Of course, the CBO also predicts that deficits will begin to rise again starting in 2016, reaching 4 percent of GDP by 2024.

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But the longer-term numbers are not enough to force any kind of action in the nation's capital, which is swiftly moving onto campaign footing for 2014. The last thing either party wants to do is take any big risks with control of the Senate very much in play. Democrats believe their economic message will play in toss-up states such as Louisiana, North Carolina and Iowa and Republican candidates will feel significant heat for not doing more to address economic inequality.

Expect to hear over and over about GOP opposition to minimum wage hikes and its refusal to extend emergency jobless benefits for the long-term unemployed. Republicans in turn will bash Democrats over Obamacare implementation and an economy that despite a drop in the jobless rate still lacks much significant traction.

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If the GOP takes the Senate in 2014, the White House will go into full defense mode, content to try to protect Obamacare and other initiatives from the first time. And if Democrats hold the Senate, there will still be little momentum to do anything about long-term deficits as the 2016 presidential election heats up.

As it stands now, the 2016 race will be fought just as the long-term problems with the trajectory of entitlement spending return to the forefront. So perhaps after that election is over, the "grand bargain" will be reborn.

—By Ben White. White is POLITICO's chief economic correspondent and a CNBC contributor. He also authors the daily tip sheet POLITICO Morning Money [politico.com/morningmoney]. Follow him on Twitter @morningmoneyben