Thursday, February 26th, 2009 at 11:03 am
Discipline, Efficiency, Prosperity
Peter Orszag, Director
Welcome to my first blog post at the Office of Management and Budget.
In this blog, I want to open up OMB even more to the public and share with you what we’re doing to address the many challenges that we face as a nation. I know that, for many people, blogs are the easiest way of receiving information – so this blog may prove to be useful even if it simply provides a convenient way of keeping up with information from OMB that is already available in other formats. President Obama is committed to ensuring a direct link between citizens and our federal government. Especially in light of our difficult economic times, I am committed to ensuring that OMB’s work is accessible. Although OMB is extensively discussed in the media and elsewhere, the blog will allow me to communicate and explain our work directly.
Today, we’re releasing the overview of the President’s Fiscal Year 2010 Budget.
The context: Twin trillion dollar deficits
We face a pair of trillion dollar deficits. The first trillion dollar deficit is the gap between how much the economy has the potential to produce and how much it is actually producing each year. We have factories, workers, tools, and supplies idle at the moment, not producing goods or services. This creates a "GDP gap" that amounts to roughly $1 trillion in 2009 (or nearly 7 percent of estimated potential output) and another $1 trillion in 2010. The American Recovery and Reinvestment Act, enacted earlier this month, was intended to start filling this hole and jumpstart the economy by increasing the short-term demand for goods and services. Boosting "aggregate demand" through increases in government spending or reductions in taxes – both of which spur economic growth in the short run – means running higher budget deficits for a period. That effect is desirable because it reflects the delivery of more demand to the economy.
As the economy recovers, however, the effect of deficits on the economy reverses. At that point, the key to economic growth switches from boosting demand for goods and services (so that existing capacity is fully used) to expanding that underlying capacity. Large budget deficits become harmful in this situation. That’s because they entail some combination of reduced funds available to finance domestic investment or an increase in borrowing from abroad to finance that domestic investment. Either way, budget deficits reduce future national income. Either the nation does not have as much productivity enhancing capital in the future (the capital needed to make our workers more productive), or we owe more to foreign creditors.
This brings me to the second trillion dollar deficit that the new Administration is inheriting—under current policies, we face fiscal deficits of almost $1 trillion a year on average over the coming decade. Over the ten-year budget window, from FY 2010 to FY 2019, aggregate deficits would total nearly $9.0 trillion and average almost 5 percent of GDP if past policies were continued. Over longer periods of time, the deficit would reach even higher shares of GDP primarily because of rising health care costs.
The Fiscal Year 2010 Budget
This Budget puts us back on a road toward economic and fiscal health by:
Being honest. If this Budget used the gimmicks employed in recent budgets, it would show a bottom line that would appear about $2.7 trillion better over ten years. For example, these other budgets didn’t include the likely cost of natural disasters or the cost of permanently continuing the temporary patch that prevents millions of Americans from paying the Alternative Minimum Tax. Using gimmicks may make good politics temporarily, but it doesn’t help move the nation forward.
Cutting the deficit in half by the end of the President’s first term. We inherited a deficit of $1.3 trillion or 9% of GDP in fiscal 2009. Even though we increase the 2009 deficit to give the economy a desperately needed jolt, over subsequent years we reduce the deficit by more than half by 2013, the end of the president’s first term: to $533 billion or 3.0% of GDP. As I mentioned above, we inherited a path of projected deficits adding up to $9 trillion over the next ten years – and our policy proposals will reduce those projected deficits by more than $2 trillion.
Reforming health care. At the President’s direction, we have begun the process of doing a line-by-line review of the Budget. One of the lines we’ve started with is among the most important to the budget and to many other aspects of our economy: health care.
As I have long said, health care is the key to our nation’s fiscal future – and there are substantial efficiency improvements that are possible to deliver better results at lower costs in the health system. In the Recovery Act and in this Budget, we begin to make the investments necessary to bring about these efficiencies over the long-term—such electronic health records and comparative effectiveness research—and also identify more immediate saving measures to slow the growth of Medicare and Medicaid spending. These savings are devoted to a health reserve fund, which will be available as we work through the legislative process on health care reform this year. This proposal is a starting point, not an ending point, for health reform as additional resources will be needed to improve and expand health care for all Americans.
Making key investments. The Budget also makes key investments in education, energy, and infrastructure. It invests in early childhood education;makes Pell Grants for college into a reliable source of support for students and indexes their value above the ordinary rate of inflation so as to better keep up with the rapidly rising cost of college tuition; and helps at-risk students complete college. The Budget also lays down a comprehensive approach to transform our energy supply and slow global climate change. And it makes infrastructure investments that will provide our nation a foundation for long-term economic growth.
I invite you to read in more detail about the President’s Budget, which can be found here.
You probably won’t agree with everything in the Budget. But at the very least, it’s honest, laying down a fair marker as to where we are now. And I sincerely believe that the first step in arriving at a plan to move forward is to reach agreement on the place from which we are starting.
This Budget is not an end-point. It is a beginning. I invite you to return to this blog to read more about our continued efforts to return prosperity to the economy, discipline to the federal budget, and efficiency to our government.