The President says the deficit is the GOP's problem now.
Amid his Reaganite sunshine and new admiration for the wonders of private enterprise, President Obama's political message in Tuesday's State of the Union address boils down to this: Republicans, it's your budget problem now.
The deficit is awful and must be cut, entitlements are unsustainable and must be addressed, the tax code hurts growth and must be reformed, and government should be smaller and more efficient, but don't look to Mr. Obama for ideas on how to fix any of this. Go ahead and cut spending and Medicare if you want, Republicans. The President will get back to you with his reply as time and politics allow.
After you, Congressman Ryan.
Editorial Page Editor Paul Gigot and Wonder Land Columnist Daniel Henninger critique the President's State of the Union address.
As political strategy, perhaps this will turn out to be shrewd. Republicans will advance their budget and spending cuts, Democrats will attack them, the voters will sour, and Mr. Obama will ride to re-election. It happened in 1996.
As leadership, however, this is an abdication that contradicts Mr. Obama's rhetorical flourishes about a new bipartisanship and the need "to merge, consolidate and reorganize the federal government." Beyond his welcome if vague support for reducing corporate tax rates in return for closing loopholes, Mr. Obama offered not a single new idea or spending cut. The bulk of his address was devoted to his familiar priorities that he said Republicans should spend more on. Green energy subsidies. High-speed rail!
At least the address had good timing, because less than 12 hours later the Congressional Budget Office released its annual budget review and exposed how deep the fiscal mess really is. Even CBO dared to call it "daunting," which for these budget gnomes is a primal scream.
Eighteen months after the recession formally ended, the federal deficit for fiscal 2011 (through September) is expected to increase once again, this time to $1.48 trillion, or 9.8% of GDP. That's a share of GDP topped since World War II only by the 10% reached in Mr. Obama's first year in office, when at least the recession was an excuse. The annual deficit in the 1980s never exceeded 6% of GDP.
As the nearby chart shows, the main culprit is spending. After falling slightly last year due in part to TARP repayments, federal outlays will climb again this year to 24.7% of GDP. Overall federal spending will have increased by $1 trillion in a mere four years. Without spending cuts, outlays will remain above 23% for the rest of the decade—starting to rise again once ObamaCare becomes fully phased in. (The outlay average from 1971 to 2010 was 20.8% of GDP.)
Compared to this spending boom, Mr. Obama's proposal to freeze domestic discretionary spending for five years is a mere gratuity. It would start from a baseline that pockets the spending increases of the last two years, which as the chart shows has taken outlays to a level not seen since World War II. And it would ignore entitlements, including his health reform. The President's proposal is a feint not a freeze.
The post-recession decline in revenues will also contribute to the deficit, thanks mainly to the slow recovery that the federal spending spree was supposed to boost. The GOP-Obama tax deal will also keep revenues as a share of GDP below 15% in 2011. But as the chart shows, revenues are expected to increase sharply in 2013 and beyond, well above the 40-year average of 18% of GDP. CBO is assuming, as it always does, that higher tax rates have little impact on economic growth.
The message in all of these numbers is that the deficit is mainly a problem of spending and slower economic growth. If the recovery continues and becomes a durable expansion, revenues will revive. But without spending cuts and entitlement reform the deficits will continue at unsustainable levels.
And as they do so will the national debt. We've never been federal debt worriers, but CBO estimates that on current trajectory the debt held by the public as a share of GDP will be 73.9% in 2012, up from only 39.7% in 2008. Those are heights where even we begin to tug at the collar.
So this is the ugly budget reality that House Republicans are inheriting. In his Tuesday night response to Mr. Obama, House Budget Chairman repeated a line he has often used that the U.S. may be at a budget "tipping point." Either Congress begins to control its political appetites, or the debt financing and inevitable tax increases that are coming will erode our economic well-being. The CBO numbers bear him out.
Judging by Tuesday night, Republicans will have to start this reformation without much help from the President. Perhaps if they lead, the public will put enough pressure on Mr. Obama that he has no choice but to follow.
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