President Obama presented last week further details of the US budget 2010. This budget of Team Obama has been developed in the financial context of the urgent need for revival of the US economy and reduction in budget deficit and in the political context of commitment to reduce social inequality, to carry out healthcare reforms and towards greater US action against global warming.
While this budget, perhaps trying to bring socialism into America, is in line with his political commitments, the trillion dollar question is whether financially the budget will deliver on its promises.
I would argue that some of the budget initiatives will be counterproductive and the desired economic goals are unlikely to be reached following these policies, though only time will be able to prove Team Obama’s financial acumen or otherwise.
Let us quickly review some of the key features of Obama $ 3.5 trillion budget for 2010 –
(a) Increase in tax rates for the rich,
(b) Tax breaks for lower income groups,
(c) Withdrawal of tax exemptions on overseas business earnings by US corporations
(d) Investment in health-care reforms in order to reduce healthcare costs in the future
(e) Price on carbon emission by corporations
(f) Defence spending at $ 666 billion at 19% of total budget
(g) Budget deficit $1.1 trillion at 8% of GDP
The budget documents show the effect of the budget proposals for the next 10 years till 2019. The real GDP growth rate for 2010 has been projected at 3.2%, assuming a turn-around in the economy from the negative growth of 1.2% in 2009. The growth rate increases to 4.0% in 2011 and to 4.6% in 2012, in the final year of the current presidential term.
Some of the long terms effects presented in the documents are –
a) Budget deficit reduces from 2009 level of 12% of GDP to 8% in 2010 and tapers off to remain at around 3% from 2012 onwards
b) Defence budget stays at $ 600-670 billion range over the 10 year period and reduces in percentage of total budget from 19% to 13% over this period. This includes “overseas contingency operations” (war chest) of $ 130 b in 2010 and $ 50 b every year thereafter.
c) Net public debt almost doubles from $ 6.9 trillion in 2009 to $13.8 trillion in 2019 and interest payouts increase four-fold from $ 164 b to $ 622 b during the same period.
There are three major problems with the financials of the budget.
The GDP growth rate assumption seems ambitious, given the budget proposes to tax the drivers of the economy, the entrepreneurs and the multinational corporations. US multinationals have dominated the markets in the world, but current policies will push them to a cost disadvantage in their overseas operations, which will be counter productive to the revival of the US economy.
The budget does not carry out any significant cut backs on the largest expenditure head in the government outlay plan. Defence expenditure continue to remain at high levels and more significantly, continue to provide for war chests for overseas operations. There seems to be hardly any justification, neither political nor economic, for spending such large sums on defence and in building war chests of $ 50 billion every year for the next 10 years.
The budget fails to provide any relief to the burgeoning public debt, which doubles during the 10 year period and creates a vicious cycle of increasing interest payments, budget deficit and further debt.
It appears that Team Obama is just praying that the economy revives quickly, despite the adverse tax measures, and that the bulging public debt does not bring it down to its knees once again. We will all join in this prayer.Email This Post 2