Bloomberg News

Obama Deficit Vow in Speech Leaves Billions to Be Found

February 14, 2013

Obama Vow to Not Add Dime to Deficit Leaves Billions to Be Found

President Barack Obama arrives at Dobbins Air Reserve Base in Decatur, Ga., on Feb. 14, 2013. He will be promoting his economic and education plan that he highlighted in his State of the Union address. Photographer: Evan Vucci/AP Photo

President Barack Obama said the proposals in his State of the Union speech won’t increase the U.S. deficit “by a single dime.” He didn’t say they’d be free.

The president’s wish list, involving a mix of one-time and continuing costs, amounts to billions of dollars largely to boost the economy and job creation. Just how many billions will become clearer when he submits his budget proposal to Congress in mid-March.

Obama’s initiatives include $50 billion for bridge repairs and other “urgent” infrastructure projects, $1 billion for manufacturing-innovation centers, and undisclosed amounts for research, clean energy, education, worker training and preschool for 4-year-olds in the U.S.

How much support the proposals get in Congress depends in part on how Obama would pay for them and on the broader political atmosphere. Republican lawmakers were skeptical.

“With a $16 trillion debt, he actually called for more spending, too --- though he didn’t say how he would pay for it or even how much it would cost,” said Senate Republican Leader Mitch McConnell of Kentucky.

While Republicans criticized the president for trying to raise taxes to expand government, Obama said the new spending he’s proposing would promote job creation and economic growth. His budget won’t be released until after a March 1 deadline for Obama and Congress to avert $1.2 trillion in automatic spending cuts known as a sequester.

Shared Costs

At an event in Decatur, Georgia, today to promote his call for universal pre-kindergarten programs, the president made no mention of how he’d pay for that plan, which would have states sharing the cost. Instead, he cited the longer term benefits.

“Every dollar we invest in high-quality early education can save more than $7 later on” with higher graduation rates and reduced teen pregnancy and crime, he said.

Any mix of revenue and cuts to pay for the president’s new programs would be in addition to $1.5 trillion in deficit reduction that Obama has already sought. Republicans oppose any further revenue increases after having accepted higher tax rates on married couples with taxable income above $450,000 a year as part of a deal to avoid an across-the-board tax increase at the end of last year.

Budget Limits

Alan Krueger, chairman of Obama’s Council of Economic Advisers, said in a post-speech question-and-answer session on the White House website that Obama’s budget proposal will spell out the costs and how to pay for them. He repeated the president’s assurance that new spending proposals won’t expand the deficit.

“He’s staying within the agreed-upon limits of the budget control act,” Krueger said, referring to the 2011 deficit- reduction law that Obama signed to lift the nation’s debt ceiling. “The president has made clear he’s willing to do the difficult spending cuts to make room” for the initiatives he wants, he said. There’s a “high return for these kind of investments.”

The president’s initiatives will be shadowed by continuing uncertainty about the U.S. economy, which unexpectedly shrank by 0.1 percent during the final three months of last year, raising questions about the recovery’s strength.

Most stocks rose a day after Obama’s address, with the Standard & Poor’s 500 Index gaining 0.1 percent yesterday to 1,520.33, the highest level since October 2007. Retail sales in the U.S. rose 0.1 percent last month, matching the median forecast of economists surveyed by Bloomberg.

Deficit Worries

Obama didn’t make clear in his speech how he’ll pay for the new programs, “and he will have to in the budget,” said Alice Rivlin, a senior fellow at the Brookings Institution, a Washington policy group. Rivlin was a budget director under President Bill Clinton.

“He knows people are worried about the deficit and he wants to reassure them,” said Rivlin, who’s a former vice chairman of the Federal Reserve. “I don’t think he reassured the policy wonks very well because he didn’t spell it out.”

On preschool access, she said, he offered “no specifics” about how the federal government would work with states. “That could be expensive or not, depending on how you did it,” she said. “Hardly any states are rolling in money these days.”

At the same time, Rivlin said, spending on infrastructure, job training and early education can help the economy.

“A lot of this depends on how well it’s managed and how effective it is,” she said.

Tax Impact

Robert Litan, director of research for Bloomberg Government, said even without seeing important details in Obama’s budget proposal, “The only way the numbers can add up must be if Congress passes the tax increases he wants because otherwise there aren’t enough budget savings, at least from the face of his speech, to pay for his new programs,” he said.

Robert Greenstein, president of the Center on Budget and Policy Priorities in Washington, said even though Republicans are criticizing Obama’s proposals, the plans sound modest.

A $50 billion proposal for infrastructure “is actually not a lot” in the context of past stimulus spending, he said.

A White House fact sheet prepared for Obama’s speech talks about providing for one year of preschool and covering low- and moderate-income children rather than all children.

Another of the president’s major proposals in the speech, raising the federal hourly minimum wage to $9, wouldn’t create new federal spending.

Higher Revenue

In his speech, Obama spoke of his commitment to $4 trillion in deficit reduction. So far, $2.5 trillion has been signed into law, a mix of $1.4 trillion in cuts to discretionary programs, $600 billion from raising taxes on wealthy Americans, and interest savings. In stalled negotiations last year with Republicans, Obama proposed another $600 billion in revenue and $900 billion in cuts to spending and entitlements.

Obama said in his speech that he would push for changes to Medicare that in a decade would be comparable to the amount of savings proposed by the Simpson-Bowles deficit-reduction commission, about $400 billion.

He urged the elimination of what he called tax loopholes for corporations and richer Americans. He also called for containing health-care costs by reducing subsidies for prescription drug companies, shifting doctor payments away from a fee-for-service model and means-testing so wealthier seniors pay more for Medicare.

Entitlement Changes

Obama has said he’ll consider reducing Social Security (USBOSOCS) cost-of-living benefit increases as some Republicans favor, only as part of a broader package of tax and entitlement reforms that also include raising more revenue from higher-income earners.

Obama’s overall approach is to stabilize the debt as a proportion of the economy. Greenstein said given the current state of the economy, that’s responsible.

“To stabilize the debt we need to substantially reduce the deficit but not to balance the budget,” Greenstein said. “If you balanced the budget right away with the economy still weak, you’d run the risk of sending the economy back into recession.”

To contact the reporter on this story: Margaret Talev in Washington at mtalev@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net


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