By James Pethokoukis @ AEI (October 4, 2012)
Several times during the first presidential debate, President Obama talked about taking a “balanced” approach to deficit reduction, meaning both tax hikes and spending cuts.
But Obama’s approach isn’t really balanced at all. Let’s take a look at his 2013 budget:
1. Obama says his budget would achieve $4 trillion in new savings, just like Simpson-Bowles. But he includes a lot of stuff in that $4 trillion that S-B do not. As the Committee for a Responsible Federal Budget points out:
‘To reach his $4.3 trillion in savings through 2021, the President’s budget counts $1.6 trillion (excluding interest) of already-enacted savings. In addition, it includes two elements which the Fiscal Commission assumed in its baseline – a drawdown of the wars ($740 billion through 2021) and the expiration of the upper-income tax cuts ($830 billion through 2021). If the Commission’s plan were scored the same way as the President’s $4.3 trillion, we estimate it would save roughly $6.5 trillion through 2021.
Compared to CRFB’s Realistic Baseline, we estimate that all new policies in the President’s budget would save nearly $2 trillion through 2022.‘
2. OK, so the real savings are around $2 trillion, not $4 trillion. And of that $2 trillion, about $1.735 trillion comes from tax increases, $230 [b]illion come from spending cuts:
3. So, when you do the math, a whopping 88% of Obama’s debt reduction comes from tax hikes. What’s balanced about that? Even worse, that approach is directly counter to economic research showing successful debt reduction programs are heavy on spending cuts and light on tax increases — just the opposite of the Obama plan. AEI’s Andrew Biggs and Matt Jensen:
‘What constitutes a fiscal consolidation? We identified fiscal consolidations using two different methods. The average result of the two methods generated the 85 percent spending share, but each method by itself produced different results. One method showed an average spending share of 66 percent, the other showed an average spending share of 103 percent.
What constitutes success? Following the literature, we called a fiscal consolidation successful if it reduced the debt-to-GDP-ratio by 4.5 percentage points. There is nothing sacred about this threshold for success. We will note, however, that the higher the threshold for success, the larger the expenditure share of successful consolidations. For instance, if we set the bar for success at 6.5 percentage points of GDP, the expenditure share of the average successful fiscal consolidation rose from 85 percent to around 100 percent.’
4. We already have an example of how Obama-style austerity works. Just look at Europe where cash-strapped governments are relying heavily on tax hikes to balance their books. As taxes go up, growth goes down. The Financial Times:
Portugal announced sweeping new tax increases in an effort to keep the country’s faltering bailout programme on track amid a powerful public backlash against increased belt-tightening.
The new round of what the government described as “enormous” tax rises came as Lisbon revealed it would miss this year’s recently relaxed budget deficit target by the equivalent of 1.1 percentage points if it failed to take exceptional measures.
The Obama debt reduction approach is dangerously unbalanced.