Why Discretionary Spending Is Being Squeezed
Has the Obama administration been planning massive cuts to discretionary spending all along?
The economist Jeffrey Sachs, writing in the Financial Times, notes that, for all the dire warnings about the sequester his team has issued over recent days, President Obama has budgeted for levels of discretionary spending just as low or lower than the levels that will be brought about by sequestration since coming into office.
Sachs is right: Obama’s first budget [pdf] after coming into office projected that discretionary spending – that is, spending that, unlike major entitlements programs, has to be appropriated each year – would fall to 7.2 percent of gross domestic product. That includes both all domestic discretionary programs and defense spending. That’s even less than the 7.6 percent of GDP the Congressional Budget Office now projects discretionary spending to be if the sequester does take effect.
Why has Obama even contemplated such massive cuts to non-entitlement spending? Sachs suggests that Obama made a “Faustian bargain.” Caught between the pressures of rising entitlement costs and fear of the political consequences of raising the tax revenues that would be needed to pay for those entitlements, he decided to cut to discretionary spending deeply – at least on paper. When it came time for those cuts to take effect Obama planned to use that moment to raise taxes instead. Sachs worries, however, that now that the vast majority of the Bush tax cuts are permanent, Obama still isn’t in a position to raise the tax revenue he needs, and will indeed preside over a reduction in discretionary spending to post-World War II record lows.
In other words, Sachs is assigning Obama some blame for not procuring the tax increases necessary to avoid the budget situation the country faces now.
This is basically a fair reading of Obama’s record on budgeting. It’s worth noting, too, that the Republican budgets formulated by Rep. Paul Ryan also included improbably aggressive cuts to domestic discretionary spending in the out years. Probably many of the same political considerations that led Obama to his “Faustian bargain” also motivated Ryan to budget for such steep cuts in discretionary spending.
It should be pointed out, though, that the future of entitlements crowding out other kinds of federal spending has arrived sooner than the Obama administration thought it would in 2009. Of course, Obama thought that the economy would be in much better shape and that he’d be in a position to implement much larger tax increases by the end of his first term, in which case the government would be better positioned to accommodate the pressures of rising health care and Social Security spending. Mostly because of lower-than-expected economic growth, the CBO expects mandatory spending to total a full percentage point more of GDP for this year than Obama’s OMB projected in 2009.
It’s possible that Obama will be able to raise taxes back to pre-Bush tax cut levels sometime in the next four years, and thereby be able to relieve some of the pressure on domestic discretionary programs in the next 10 years. But it’s hard to imagine a scenario in which it would happen, given that Republicans will control the House for at least the next two years. In the meantime, the projections for discretionary spending will continue to become reality. Here’s the CBO’s depiction:
Abstracting away from the various recent budget negotiations and political showdowns, it looks like Obama faced a decision between raising taxes to above-'90s levels and/or overhauling entitlement programs and letting discretionary funding get crowded out. The looming sequestration and budget caps are the consequences of that decision.