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Notes on the Budget

Posted by Peter Orszag on March 03, 2009 at 11:29 AM EDT

I am testifying (pdf) today before the House Budget Committee and wanted to share my notes on the budget.

Deficit $2 trillion higher for this year and next because of crisis we inherited.

The economic crisis we’ve inherited raises the deficit by roughly $2 trillion (for this year and next year combined). The crisis raises the deficit by:
  • Adding more than $600 billion of deficit spending ($300 billion a year) because a weak economy reduces revenue and increases spending on automatic stabilizers (like unemployment insurance) 
  • Requiring $650 billion or more to stabilize financial markets (including placeholder):
    • $171 billion for stock purchases in Fannie Mae and Freddie Mac
    • $247 billion in federal costs for TARP
    • $250 billion placeholder in case additional actions are necessary
  • Creating the need for the $787 billion Recovery Act to jumpstart the economy 
Deficit would be another $2 trillion higher over the next 10 years without our policies – and we wouldn’t have cleaner energy, better education, or more efficient health care

The deficit reduction comes from:
  • Responsibly redeploying our military forces engaged in overseas contingency operations, as well as reforms that would allow us to get more for the money spent on defending the nation 
  • Returning fairness to the tax system by closing tax loopholes, eliminating subsidies for special interests, and returning to the pre-2001 tax rates for high-income families making more than $250,000 per year (over next ten years, these revenue enhancements would reduce deficits by roughly $1 trillion)
  • Making government more efficient – for example, by eliminating unwarranted subsidies to middlemen on educational loans and reducing erroneous payments (these two steps would reduce deficits by almost $100 billion over next ten years)
Over the long term, health care is the key to our fiscal future – and the Budget proposes a $634 billion reserve fund to begin the process of reducing costs and improving quality.
 
The budget is fiscally responsible and not "big spending"

The Budget represents a major break from recent practice because it pays for new initiatives (e.g., in health care and energy) rather than enacting expensive new programs (such as the prescription drug benefit) without paying for them.
 
Furthermore, when critics speak of "government spending," they often mean non-defense discretionary (NDD) spending—the annual appropriations outside defense. 
  • The average level of NDD spending between 1969 and 2008 was 3.8 percent of GDP. 
  • In contrast, the President’s Budget proposes a gradual reduction in NDD spending as a share of the economy. Such spending averages 3.6 percent of GDP from 2010 to 2019 and declines to 3.1 percent by the end of the budget window – the lowest since the data began in 1962.
 
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