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TDS Co-Editor William Galston: The Coming Budget War

This item by TDS Co-Editor William Galston is cross-posted from The New Republic.

When President Obama sends his latest budget proposal to Congress on Valentine's Day, how will we know whether he is floating a serious proposal or just playing politics? I've written a guide to help TNR's readers figure it out.

In its latest long-term budget and economic estimates, the CBO looks at our fiscal future in two different ways. Its "baseline" budget assumes that current law does not change. Under that scenario, the deficit declines to about 3 percent of GDP by mid-decade and remains there until the end of the ten-year budget window. Debt held by the public rises from $10.4 trillion to $18.3 trillion, net interest payments increase from $225 billion in 2011 to almost $800 billion in 2011, and debt held by the public reaches 77 percent, the highest level since the end of the Truman administration.

And that's the good news--too good to be probable, in fact. It presupposes steady growth without a recession between now and 2021, a longer uninterrupted period of growth than we have ever experienced. Moreover, in following current law, as it is required to do in constructing its baseline, the CBO assumed that all the Bush tax cuts expire in 2012, that the alternative minimum tax would expand to hit many more households than ever before, and that sharp reductions in Medicare payment rates for doctors take effect at the end of 2011. For those assumptions to come true, Congress would have to make decisions that it has steadfastly rejected for many years, and Obama would have to abandon his pledge not to raise taxes for families with annual incomes below $250,000.

The CBO's second projection uses more realistic assumptions. It forecasts that the deficit would average more than 6 percent of GDP over the next decade, and debt held by the public would skyrocket by $12 trillion to 97 percent of GDP, a level that few economists contemplate with equanimity. This prospect, not current law, defines our real baseline for the next decade. And it gets much worse in the decade after that. It has become a cliché to suggest that we are on an "unsustainable" course. It is also the truth.

This framework gives us a metric for evaluating the claims and counter-claims, proposals and counter-proposals, with which we are about to be deluged. It is expected, for example, that the president's budget will propose a five-year freeze on non-security related discretionary spending, which senior officials estimate would reduce the deficit by about $400 billion over the next decade. As they say, that's real money. But it's only 6 percent of the total baseline deficit we'll incur during that period, and only 3 percent of the deficit projected using more realistic assumptions.

Is the White House taking these projections seriously? As OMB director Jack Lew said last week in an op-ed titled "The Easy Cuts Are Behind Us," because non-security discretionary spending amounts to little more than a tenth of the federal budget, "cutting solely in this area will never be enough to address our long-term fiscal challenges." When the administration releases its FY2012 budget, we'll be able to compare it to these numbers and see if Obama's priorities tackle this basic truth.

The signs so far are not encouraging. Based on what Lew said and on other straws in the wind, it seems unlikely that Obama will offer concrete and significant proposals--to raise revenues (even in the context of fundamental tax reform), to make more than marginal cuts in security-related spending, or to begin the task of adjusting entitlement spending to reality. If so, he will have missed an opportunity to exert truly transformative leadership. And if he doesn't lead, Congress won't do it for him.

The conventional wisdom is that proposing such drastic cuts would be horrible politics because the American people are simply not prepared to entertain, let alone accept, the kind of measures needed to put the country on a sustainable course. There's a lot of solid survey evidence to back up that belief. But as the president contemplates his options in the fiscal debate that begins next week, he might want to consider the findings of another survey released by Gallup on Wednesday. Only 27 percent of the people approve of his handling of the federal budget deficit, by far his lowest grade in any sector of public policy. Worse, only 19 percent of Independents approve. Obama may be hoping that these unaffiliated voters, 52 percent of whom supported him in 2008, don't care very much about fiscal issues. Pretty soon, we'll find out.