America's budget

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Clueless in Washington

Neither the president nor Congress shows any sign of knowing how to tackle the deficit

Feb 4th 2010 | From The Economist print edition

Unlike other rich countries, America lacks the “automatic stabilisers” that kick in during times of recession to help boost demand. Unemployment benefit is extremely limited. [snip]

So the eye-popping $1.56 trillion deficit for the current fiscal year previewed in this week’s budget (see article), to be followed by a further $1.27 trillion in fiscal 2011 (which begins on October 1st), ought mostly to be seen as a consequence of the downturn that Mr Obama inherited. [snip]

What is truly worrying, though, is the medium-term outlook. Mr Obama’s budget reveals a road-map to fiscal catastrophe. At no point over the coming decade will the deficit be below 3.6% of GDP; and after 2018, it starts rising again. The cuts the president has proposed are comically insufficient: a budget freeze on non-security discretionary spending, which amounts to only about 17% of the entire $3.8 trillion budget; and a toothless deficit commission (a better version has already been killed by obstructive Republicans in Congress) whose recommendations will doubtless be ignored. (Emphasis added)

Entitled to live in debt for ever?

In the medium term there are only two ways to bring the deficit back to a sustainable level—which means no more than 3% of GDP. Either taxes will have to rise, or a serious attempt must be made to rein in the entitlements—legally mandated programmes such as Medicare, Medicaid and Social Security—that constitute the great bulk of spending. Mr Obama is proposing only a bit of the first, and none of the second. Taxes on the rich (those earning $250,000 a year or more) will go up from next January, as the Bush tax cuts expire; but Mr Obama had promised middle America that it will pay “not one single dime” more in tax, and so he is extending George Bush’s budget-busting tax cuts for the remaining 98% of Americans.

Any serious attempt to tackle entitlements now looks doomed. Health care offered a chance to do so (broader coverage could come with tougher cost controls). But a weak administration and a greedy Congress conspired to produce a baggy monster of a bill which, from a fiscal point of view, might have made things worse. No one dares touch defence, in a troubled world. The Social Security pension scheme is deemed sacrosanct by nervy politicians. It is a deeply depressing picture—and Mr Obama did nothing this week to lighten it. (Emphasis added)

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