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A Bold, Balanced Plan? Analysis of Obama’s Deficit Reduction Proposal

September 21, 2011

President Obama: Now, I’m proposing real, serious cuts in spending. When you include the $1 trillion in cuts I’ve already signed into law, these would be among the biggest cuts in spending in our history. But they’ve got to be part of a larger plan that’s balanced

Deficit reduction is on everyone’s mind these days, and the President is no exception. On Monday, he released his deficit reduction plan, and the number being touted is $4 trillion in deficit reduction over the next ten years. Any serious attempt to get the deficit under control should be lauded, but is this a serious attempt? In short, it depends who you ask. First a little perspective on the deficit reduction target.

As the President acknowledges in the introduction to the plan, which can be found in its entirety here, this $4 trillion includes the almost 1.2 trillion in deficit reduction that was already signed into law with the Budget Control Act (BCA)associated with the divisive debt ceiling deal.  It is therefore misleading to include these in trying to frame the current deal, these spending cuts are already signed into law, and should not be counted in terms of net deficit reduction for this deal, or for keeping a balance between tax increases and spending cuts. So the deficit reduction plan, excluding the already in place BCA spending cuts, still promises almost 3 trillion in spending cuts, which is substantial. Surely there will be a balance between spending cuts and tax increases in this remaining portion, the President did say there are ‘real, serious cuts in spending.’ Unfortunately, this does not appear to be the case.

Looking at the remaining almost 3 trillion, almost 1.1 trillion in spending reductions come from drawdowns in Afghanistan and Iraq. This same budget trick was tried by both Republicans and Democrats in the debt ceiling dealings, and was soundly rejected as actual deficit reduction, as it should be here. There are already planned drawdowns in overseas contingency operations, and these savings are not new deficit reductions, or the kinds of real spending cuts that are needed. So these aren’t new, or even real spending cuts, and excluding this and the BCA cuts the deficit reduction plan is down to roughly 1.7 trillion in cuts over the ten years.

When the tax increases and the reductions in debt service are also excluded, this drives the number of spending cuts over the ten-year life span of the deficit reduction plan down to $578 billion, which still sounds like a serious spending cut, and one that should allow the US to make some progress on deficit reduction, but that is before that figure is put into perspective.

The Office of Management and Budget Mid-Session Review puts government spending for this ten-year period at $48.75 trillion dollars. Granted, these do not factor in the cuts, so using these figures and imposing the proposed reductions, government spending will be around 45.5 trillion.

So that $578 billion in spending cuts over the ten-year period translates to a 1.26% reduction in federal government spending over the same period. Serious cuts, these are not.

One counterpoint that might be offered is that the bulk of the deficit reduction takes place in the later years of the period, and this is true. However, even in the last year of the plan, the spending cuts of 97 billion amount to only 1.92% of federal spending that year.

With the inclusion of already planned Iraq and Afghanistan military drawdowns and the already in place BCA spending cuts, it becomes apparent that the vast majority of the deficit reduction in this plan comes from tax increases. If this is the plan that the Obama Administration wants to propose to fight increasing deficits, that is perfectly fine, many on the left have been urging Obama to do exactly that, and the American people can then decide if that is the plan they want. Using budgetary illusions and vague wording in an attempt to deceive voters into believing this package is either balanced or contains substantial spending cuts is wrong, no matter where on the political spectrum you stand.

NPR had a very informative, and at times heated, debate between two economists from opposite sides of the political spectrum, Russ Roberts and David Osborne. The part with the two economists last about 20 minutes, and it more interesting than the vast majority of coverage on the deficit reduction plan, and I highly encourage giving it a listen.

NPR\’s On Point Discussion of Deficit Reduction Plan

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  1. David Nordmark.com » Budget Cuts vs Tax Increases

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