S President Barack Obama (C), alongside Erskine Bowles (L) and Sen. Alan Simpson (R), co-chairs of the National Commission on Fiscal Responsibility and Reform, speaks on financial reform in the Rose Garden of the White House in Washington, DC, April 27, 2010. AFP PHOTO / Saul LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
President Barack Obama says his budget blueprint unveiled Monday would result in $2 trillion of reduced deficits over the next 10 years.
Obama's budget plan expects savings of about $1 trillion to come from domestic spending reductions and ending certain tax breaks. But in addition, his budget anticipates another $1 trillion in savings in the projected cost of overseas military operations over the next 10 years.
The National Commission on Fiscal Responsibility and Reform he created last year came up with a plan that it said would achieve almost twice the amount of deficit reduction in Obama's 10-year proposal.
Why would Obama’s proposal, if enacted, fall short of the one offered in December by the commission headed by Erskine Bowles and Alan Simpson? What could they do that Obama and his budget planners couldn’t?
First, a word of caution: both Obama’s plan and the one produced by the Bowles-Simpson commission are proposals, not laws — and both made certain assumptions about the future performance of the American economy. Both of them incorporate a lot of guesswork about the future.
And it would take an enormous effort by Congress to transform either plan into enforceable law.
But that said, there are some crucial differences between the Obama plan and the fiscal commission plan.
Bigger cuts from fiscal commission
The commission plan calls for significantly bigger cuts in future spending than Obama does.
By 2020, the commission would bring spending down to 21.8 percent of gross domestic product while Obama would reduce it to 23 percent of the gross domestic product.
Back in the 1950s, spending averaged only 18 percent of GDP. Currently spending is nearly 25 percent of GDP, according to the non-partisan Congressional Budget Office.
Each percentage-point difference of spending as a share of GDP amounts to about $150 billion, given the current size of the American economy.
The commission plan would entail much bigger spending cuts each year — more than $150 billion bigger — than Obama is proposing.
Focus on discretionary spending
Much of the focus in the administration’s rollout of Obama’s 10-year blueprint has been on discretionary spending, the items Congress decides on every year: how much money agencies such as the FBI and the Environmental Protection Agency get to spend in the next year.
Under Obama’s plan, discretionary spending over the 10-year budget forecasting period would be 24 percent higher than under the fiscal commission plan.
Under Obama’s 10-year plan, defense and security spending, which is a subset of discretionary spending, would be nearly 30 percent higher than under the commission plan. Neither the Obama plan nor the commission plan details exactly which weapons systems would be cancelled. But the commission plan would require that overseas military operations be budgeted for. Under the commission plan, the Senate would need a three-fifths vote to exceed the budgeted level for overseas operations.
Even if Congress sat on its hands and nothing in current law were changed, discretionary spending would keep falling as percentage of the total budget and as a percentage of GDP.
That’s because entitlement spending — Medicare, Social Security, and Medicaid — is growing inexorably due to demographics, the increasing cost of medical care, and built-in increases in the Social Security benefits formula.
As entitlement spending increases as a share of total outlays, discretionary spending must, by definition, decrease as a share of the total. So to some extent, the focus on the discretionary side is a choice to not examine the bigger problem.
Bigger tax increases from fiscal commission
The commission plan would raise more revenue over the next 10 years than Obama’s plan would.
The commission proposes to eliminate many of the tax credits, deductions, and other preferences that benefit particular groups of taxpayers or special interests.
It would keep mostly intact the two biggest preferences: the mortgage interest deduction and the tax-free status of most employer-provided health insurance. The commission would pare back the mortgage interest deduction by allow it only for mortgages of less than $500,000.
The commission claims that a cleaner, simpler tax code, with fewer tax breaks and lower rates, should result in $785 billion in new revenues from 2012 to 2020.
Although the commission’s proposals on Social Security would have most of their impact after the end of the 10-year forecasting window, it did call for one tax increase that Obama hasn’t included in his plan: increasing Social Security taxes on high-earning workers.
By 2020, the commission’s recommendation would result in earned income of up to about $190,000 to be subject to Social Security taxes, compared to $168,000 under current law. That tax increase would raise $138 billion in new revenue from 2012 to 2020.
The commission also wants to raise the gasoline tax $114 billion over 10 years.
Unlike Obama, the commission also called for requiring people on Medicare to pay more for the medical care they get.
People on Medicare are consuming too much health care, the commission said. “Because cost-sharing for most medical services is low, the benefit structure encourages over-utilization of health care,” the commission report said.
The commission proposed to increase cost sharing by establishing an annual Medicare deductible of $550, along with 20 percent uniform coinsurance on health spending above the deductible. If enacted, this proposal would raise $110 billion from 2012 to 2020.
So what did the Bowles-Simpson commission do in their proposal that Obama didn’t?
They proposed fiscal medicine that is very bitter and perhaps politically toxic: spending cuts, tax hikes, and cost shifting to Medicare beneficiaries. All of the ideas were serious — and all would cause most taxpayers acute pain they could not shrug off.