OBAMA MUST LEAD ON DEFICIT CUTS / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

Obama must lead on deficit cuts

By Clive Crook

Published: February 13 2011 19:55

If today’s budget from the Obama administration has a plan for restoring long-term fiscal balance, Washington will be stunned. Bits of policy have already been announced, and the thinking was advertised in the State of the Union address last month. According to these trailers, the theme will be: “Why do today what you can put off till 2013?” Or maybe: “It’s the politics, stupid.”


President Barack Obama is asking Congress to freeze non-security discretionary spending for the next few years, pay for some new infrastructure and reform corporate taxes. It is not enough. A budget serious about long-term fiscal restraint must raise revenues and go after the four big spending programmes that the freeze would exempt: social security (pensions), Medicare and Medicaid (health insurance for the elderly and the poor, respectively), and defence.


This time last year Mr Obama sent Congress a budget of the same shape, with the same key defect. His plans called for primary budget balance (that is, a zero deficit, excluding debt interest) by the middle of the decade, which would be enough to stabilise the national debt. But the section on how to do it was left blank. Everything depended, the document and its supporting tables explained, on the findings of the president’s fiscal commission. These would show how to bridge the impressive space between the taxes and spending in the administration’s proposal and the deficit target the administration had just set.


The fiscal commission has reported. A majority of its members supported its findings, which called for comprehensive tax reform and a gradual programme of savings. The president’s support for the report has been tepid. In the State of the Union address he thanked the panel for its work and noted he did not agree with all its views. How brave.


Since last year’s budget, the fiscal position has worsened, partly because of the tax-cut compromise passed by the lame-duck Congress in December. That package made good economic sense: it avoided an ill-timed tax increase, provided a needed extension of unemployment benefits, and delivered, in effect, a moderately sized second stimulus. But this is the moment to reset long-term policy, or at least discuss it.


The politics of austerity are never easy, but if the budget challenge cannot be taken up this year, when can it? It is two years until the next elections. You might think it early to be paralysed by fear of voters’ reaction to tax increases and spending cuts. You would be wrong. Absurd as it sounds, Washington is already in pre-election mode.


This is the nub of the problem. Politically, a timid budget might well be wise. The White House fears, with reason, that if it backs a plan on the lines of last year’s Bowles-Simpson deficit reduction commission, it will expose itself to a withering GOP assault. The commission rightly insisted higher taxes must be part of the solution, and it explained how this could be made more palatable – income tax rates would actually come down – if reformers focused on closing tax exemptions and broadening the tax base. But in the end higher taxes are higher taxes; and doing as the panel suggested would require Mr Obama to break one of his 2008 election promises.


If congressional Republicans included many responsible fiscal conservatives, the White House could hope to build a cross-party alliance. Forget that. The maniacal cut-baby-cut strand of conservative thinking is in the ascendant. The new House Republican majority wants to chop as much as possible, and then some, from public spending. It will not countenance tax increases of any kind. If Mr Obama took up the balanced Bowles-Simpson approach, the GOP would savage him for it.

Would the president win that battle for public opinion? That is a hard question. There is truth in the maxim that in a democracy, voters get the government they deserve. Polls show US voters are worried about public borrowing – but firmly opposed to increases in their own taxes. It might take more than Mr Obama’s powers of persuasion to change their minds.


One can see why the administration is content to let House Republicans take the lead. Their happy axe-work is likely to scare many voters back to the Democrats. But this problem will not wait for enlightenment to descend on Capitol Hill. Mr Obama surely understands the economic danger. He was elected to lead. He should take a chance and do his job.


Copyright The Financial Times Limited 2011.