Most people understandably won’t make it to Table 6-2 of the Analytical Perspectives companion volume released with the Obama administration’s budget. This table, though, foreshadows the fight that will come at about this time next year -- and is thus one good way to view the budget as a whole.
Table 6-2 shows that even with a somewhat sunny outlook for economic growth this year, the amount of government debt that is applicable to the debt limit is projected to reach, by the end of September, $16.3 trillion. The debt-limit itself currently stands at $16.4 trillion. So by next January, if not sooner, we will again be debating a debt-limit increase -- at the same time that significant spending reductions and tax-cut expirations are scheduled to take effect. The journey through this fiscal maze next year will make last summer’s debt-limit debate look like child’s play.
In the meantime, we should keep five basic fiscal principles in mind. The administration’s budget abides by most of them, albeit to varying degrees.
First, in the short run, we should continue to support the economy, which is finally showing some glimmers of life, with additional stimulus. The apparent breakthrough on extending the payroll-tax holiday, which is scheduled to expire at the end of this month, is encouraging from this perspective. President Barack Obama’s budget proposes even more short-term support for the economy. And although the additional measures -- more spending on roads, bridges and other infrastructure projects, for example -- may not be enacted this year, the administration deserves kudos for continuing to propose them.
Forecasts Are Uncertain
Second, whenever possible, we should tie additional stimulus to economic indicators -- for example, the unemployment rate or the employment-to-population ratio -- rather than trying to guess precisely when the support will no longer be needed. The economic picture has been looking better in recent months, but the truth is that we’ve been here before, both during the summer of 2009 and the early part of 2011, and have seen the economy then sputter. Economic forecasts are extremely unreliable, and rather than pretend to know the exact date when the economy will no longer need help, it would be better to take the guesswork out. Unfortunately, the policy debate once again seems to presume we know for sure how the economy will perform this year and next.
Third, upfront stimulus should be coupled with deficit reduction that takes effect with a delay -- both because that would help to make the stimulus marginally more effective and because it would help to address an underlying long-term problem the nation faces. No one should favor immediate fiscal austerity when the labor market remains so weak, but the optimal combination from a policy perspective remains to combine more stimulus now with much more deficit reduction, enacted now, to take effect over time. (By the way, my strong support for such a coupled stimulus approach, including while I served in the Obama administration, has been misinterpreted by some as strong opposition to additional stimulus. That is simply wrong.) The administration’s new budget includes less of the out-year deficit reduction than it should. When we run into the fiscal trifecta next year -- as we hit the debt ceiling and face automatic spending cuts and tax increases -- more will ultimately be necessary to get a deal done.
Need for Revenue
Fourth, to significantly reduce the deficit over the next decade, additional revenue will be needed. The administration’s budget proposal projects revenue to reach 20 percent of gross domestic product by 2022, about 1 percentage point of GDP more than what is projected with no policy change. The administration deserves credit for proposing even that, given the antipathy to any tax increases. But in the end more revenue will be needed. And since the administration’s budget probably shows the outer limit of what’s plausible in terms of taxing high-income households, the implication is that middle-income households will have to pay more, too.
Finally, while the large fiscal-policy questions will remain in limbo until the end of the year, there are many small-scale things that could be done. The administration’s budget contains many such ideas. For example, it proposes altering the structure of fees paid by airlines and private jets, to better reflect the fact that each flight (and not the number of passengers on board) imposes a cost on air traffic control systems. And it proposes making it easier for workers who aren’t offered a 401(k) plan to save automatically in an individual retirement account set up by their employer. The administration is also promoting a “Pay for Success” approach in several grant programs, under which the government would pay only if agreed-upon objectives (such as improvements in job placement or reductions in recidivism) are achieved.
While we wait for the fiscal drama early next year, we might as well get busy doing some of these things.
(Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)
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