Fisher Investments Editorial Staff
Deficits, Politics, US Economy

A Budget Battle

By, 02/15/2011

Story Highlights:

  • President Obama revealed his $3.73 trillion budget—it had few surprises and overall confirmed verbal commitments he made during the State of Union address.
  • Tax increases for corporations, the Energy industry, and the wealthy were proposed—but Medicare, Medicaid, and Social Security were left mainly intact.
  • Obama's budget is just first of many steps toward the final product—it still needs to be reviewed and approved by the House and Senate.
  • The likelihood of the budget being passed fully intact is unlikely—per usual, lawmakers are unable agree on spending cuts and tax increases.

President Obama revealed his $3.73 trillion 2012 budget on Monday—it featured few surprises and was essentially a confirmation of verbal commitments made during the State of the Union address.

Purportedly in an effort to reduce US debt, the budget proposes tax increases for investment managers and US-based multinational companies, ending tax breaks for the Energy industry (namely oil, gas, and coal companies), limiting itemized deductions for high-income families (those making more than $250,000 a year), and reducing defense spending by $78 billion over the next five years. However, big line items like Medicare, Medicaid, and Social Security programs were left mostly untouched. 

If Obama manages to get his budget passed by Congress fully intact, the Office of Management and Budget estimates it would reduce deficits by about $1.1 trillion over the next 10 years. But the budget passing in full as-is is unlikely. The proposed tax increases were already ignored when Democrats controlled both congressional chambers, and now it faces criticism from the Republicans currently controlling the House. And never mind that to generate these "savings," the proposed budget (passed in full) must stay in force far beyond the present term of any currently elected official. For example, the White House estimates eliminating the aforementioned tax breaks for energy companies will generate $46 billion in revenue—but over a 10-year period. What are the odds that over the next 10 years industry-level tax incentives don't change? (Answer: Low.)

What's more, what are the odds the revenue projections determining the tax savings are actually close to right? Or the affected firms don't find a way to subvert their new, higher tax burden? (Answers again: Low.) No matter how the final budget looks, government savings and expenditure estimates have significant flaws anyway. Government costs are based on a series of assumptions—assumptions those calculating are told to make—which often prove far from reality. Projections may be based on a current snapsnot of today's conditions (which can change radically) or policy-driven wishful thinking (which can be shockingly wrong). Or sometimes, projections are just tough because of the many thousands of moving variables (economic growth impacting tax receipts, for example) that are nigh on impossible to project with laser precision. One example is the Troubled Asset Relief Fund (TARP), the $700 billion bailout that never cost $700 billion—and now seems likely to cost very little relative to the headline number. (Keep in mind, though, a government program that ends up costing less is the exception rather than the rule.)

Obama's proposed budget is just the first of many steps toward a final product—it still must be approved by both the House and Senate. Meanwhile, Republicans currently seem satisfied in their desire to make spending cuts of their own—but even then, they can't agree on what to cut and when. Expect a lot of ongoing blustering and political finger-pointing on both sides—this fight is far from over.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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