US budget: is Obama being too optimistic?

US budget: is Obama being too optimistic?
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First Published: Sat, Feb 28 2009. 12 02 AM IST

Updated: Sat, Feb 28 2009. 12 02 AM IST
US President Barack Obama’s budget combines a huge deficit in 2009 with ambitious plans to reduce it sharply by 2013, as well as major new government programmes. It’s a very high-risk strategy, requiring the economy and markets to be as responsive as US voters were to Obama’s optimism.
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There’s a lot in the budget to like. Obama’s health care reforms are supposedly paid for by savings in the Medicare, the current US health plan for the elderly, and reductions in tax allowances for those earning more than $250,000 (about Rs1.26 crore). The detail evident in the medical savings proposals suggests serious thought, and that they may be achievable. Still, the $633 billion the measures are meant to save over 10 years doesn’t buy all that much healthcare reform these days.
Another attractive change is the requirement for businesses that don’t currently offer retirement plans to establish them automatically for employees, who can opt out if need be. These are meant to supplement the government pension system, social security, for middle-income earners.
Charismatic numbers: US President Barack Obama’s budget assumes a modest recession with growth above 4% in 2011 and 2012. Gerald Herbert / AP
However, the economic and fiscal assumptions seem optimistic. The budget assumes a modest recession with growth above 4% in 2011 and 2012. It assumes inflation below 2% annually and interest rates peaking at 5.1%, despite the large deficits. The budget also contains some uncertain revenue sources.
It assumes government spending falls 10% in 2010 (which is probably feasible absent more bank bailouts) and then rises only 2% nominally in 2011 and 1% in 2012—that is, less than inflation. Finally, it assumes a 67% recovery on bailout investments, which, given the performance of recipients such as American International Group Inc., may be optimistic.
Even so, the deficit would exceed $1 trillion in 2010 and is within a whisker of it in 2011. A trillion-dollar deficit for one year in a deep recession may be financeable, though the 12.3% of gross domestic product deficit in fiscal 2009 (plus refundable amounts in bailout investments) is stretching the debt markets’ capability.
Three trillion-dollar deficits in succession look to be too much. Either they will crowd out private borrowers, perpetuating the recession, or they will need to be funded by money printing, producing inflation. It remains to be seen whether Obama’s optimism can work a miracle on the bond markets.
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First Published: Sat, Feb 28 2009. 12 02 AM IST