The Obama administration released its fiscal year 2011 budget this week, and its projections continue to reflect the poor state of the economy. The recession—with its greater unemployment and lower incomes—automatically leads to lower revenues and higher spending levels: 2011 revenues are projected to be significantly below trend (at 16.8% of gross domestic product), and outlays are projected to be higher than trend (at 25.1% of GDP). However, the resulting deficit in 2011, at 8.3% of GDP, would be down from the 10.6% projection for 2010.
The overall forward-looking trend in the deficit is positive, with the deficit as a share of the economy peaking in 2010, and then falling to around 4% of GDP for 2013 through 2020. Relative to the baseline scenario—which includes a continuation of current policy, such as the 2001 and 2003 tax changes—the President’s budget reduces total deficits by over $2 trillion, or about 1% of GDP each year, on average.
The budget includes funding and placeholders for further action on job creation, including additional funds for tax credits, unemployment supports, and aid to state governments. These efforts, together with an extension of the Making Work Pay credit and other provisions, would total nearly $250 billion in 2010 and 2011. These efforts would boost employment and economic growth over the next 18 months. The number of jobs created will be determined by the final mix of policies enacted by Congress.1
The funding for the jobs initiative includes:
- $25.5 billion in additional aid to state governments through a six-month extension of Medicaid assistance to states. The projected shortfall in state governments in fiscal year 2011 exceeds $100 billion, so this effort is still not sufficient to prevent states from cutting services or raising taxes in order to balance their budgets. 2
- $49 billion in 2010 and 2011 for extended unemployment insurance benefits. This would allow for some near-term extension of expanded unemployment benefits. However, with costs of around $7 billion per month, this funding level would not be sufficient to extend the current benefit structure through the end of the year.
- $8 billion in 2010 and 2011 to extend COBRA health insurance assistance.
- A placeholder for an additional $74 billion in tax reductions or outlay increases in 2010 and 2011.
Freeze on non-security discretionary appropriations
This budget attempts to preserve some of the President’s core priorities—including increases in the departments of Education, Energy, Transportation, and the National Science Foundation—but it also restrains many spending areas. As promised in the State of the Union address, non-security discretionary appropriations are frozen for three years at 2010 levels, which represents an inflation-adjusted reduction in this category of spending (see Figure A).
Figure B shows the percent increase from 2010 to 2011 in funding available to each agency. Of those agencies subject to the freeze—the Small Business Administration, National Science Foundation, Education, Energy, Transportation, and NASA—all see nominal increases, while other agencies would see declines.
The President’s budget includes a variety of changes on the revenue side of the budget. In total, the budget would reduce income taxes for most taxpayers, while increasing taxes for high-income taxpayers and corporations that currently exploit a variety of loopholes.
Specific policy proposals include:
- A variety of tax cuts that would benefit low- and moderate income taxpayers. These include an extension of the Making Work Pay tax credit, expanded earned income tax credit, additional savings incentives, expanded child and dependent care credit, and others.
- Closing a variety of tax subsidies and loopholes. These range from preferences for oil and gas companies to reforming international tax laws. In total these changes would yield approximately $45 to $50 billion annually once fully implemented.
- Allowing the 2001 and 2003 income tax laws to expire for high-income (over $250,000) taxpayers. Reinstating prior top marginal income tax rates, capital gains rates, and other changes would yield $33 billion in 2011, growing to $97 billion in 2020.
- Limiting to 28% the value of tax deductions, which would yield $21.6 billion once fully implemented in 2012, growing to about double that in 2020.
Although significant challenges remain over the long term, the larger threat to the economy comes from economic stagnation and slow job growth. A weak recovery will mean lower revenues and higher spending, compounding the nation’s fiscal problems. The first thing we must do to address the long-term debt is to put Americans back to work so we can get the recovery on the right track.
1) EPI has proposed a comprehensive package to create at least 4.5 million jobs. See “American Jobs Plan” at http://epi86dev.wpengine.com/index.php/american_jobs/understanding_the_jobs_crisis.
2) See “Dire States” at