Obama’s Calculations on the Deficit and Debt

On Tuesday, the Obama administration released an interesting if dead-on-arrival 2015 budget. The big message is that the White House wants to bolster support for the poor and middle class, paying for such measures with increased taxes on high-income households.

But it also would accomplish one other big, big goal: It would set the country on a budget path to much smaller deficits and falling debt in relation to economic output. Here’s the relevant chart.

Office of Management and Budget

So how does President Obama start to bring the debt down? Simple arithmetic: Smaller deficits fueled by increased taxes and reduced spending, along with the presumption of solid economic growth.

Let’s compare President Obama’s suggested spending and revenue figures with the Congressional Budget Office’s best guess at how the numbers would turn out if policies remained static.

Here are the spending figures in President Obama’s budget:

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Receipts Outlays Deficit

2,775	3,002	3,337	3,568	3,811	4,030	4,226	4,452	4,706	4,954	5,212	5,478
3,455	3,651	3,901	4,099	4,269	4,443	4,729	4,964	5,209	5,485	5,694	5,912
680	649	564	531	458	413	503	512	504	530	482	434

And here is the same budget window, per the Congressional Budget Office:

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Receipts Outlays Deficit

2,774	3,029	3,305	3,481	3,631	3,770	3,932	4,104	4,288	4,490	4,702	4,926
3,454	3,543	3,783	4,020	4,212	4,425	4,684	4,939	5,200	5,522	5,749	6,000
680	514	478	539	581	655	752	836	912	1,031	1,047	1,074

The White House cuts outlays, relative to the budget baseline it uses in its report. In terms of entitlement spending, it picks up significant savings from Medicare. For instance, in 2020, it sees $1.2 trillion in spending on Social Security, $690 billion on Medicare and $439 billion on Medicaid. In the baseline, that’s $1.2 trillion on Social Security, $734 billion on Medicare and $440 billion on Medicaid.

On the discretionary spending side, Mr. Obama expands domestic programs at the expense of defense programs. In 2020, his budget shells out about $583 billion for defense and $593 billion for nondefense programs - education, housing and so on. In contrast, the baseline shows $711 billion in military spending and $581 billion for nondefense programs. The White House also sees the government spending less on interest than the baseline scenario. For 2020, it sees $616 billion versus $635 billion.

Match that with hundreds of billions in new tax dollars on the revenue side of the ledger, and you have much, much smaller deficits - meaning a debt that grows in absolute terms but shrinks relative to the size of the economy.

“The budget shifts away from harmful short-term deficit reduction by replacing remaining sequestration cuts with smart, balanced long-term deficit reduction,” the White House said. “It focuses on the primary drivers of long-term deficits - rising health care costs and inadequate revenues to meet the needs of our aging population while making the investments needed to strengthen the economy both now and in the future.”

But it is worth noting that perhaps the single most important factor when it comes to deficits is largely out of the White House’s hands: economic growth. Mr. Obama’s budget assumes that there will be no recession for the next decade - indeed, he sees a moderate but strengthening recovery. History suggests those might be the most unrealistic numbers in the document.