It’s easy to be cynical about President Obama’s 2013 budget, which will be released later today. Like the 2012 budget, it has no chance of being adopted by Congress. The big ideas in it are DOA in the House. In fact, most of its big ideas — $1.5 trillion in tax increases, taking some of the money we’ll save from winding down the wars and investing it in infrastructure — have already been announced, either in the American Jobs Act, the White House’s subsequent deficit-reduction recommendations to the supercommittee, or the State of the Union. Which isn’t to say that the budget isn’t important. It’s just that what’s important in it may not be what will grab headlines. But here’s what to watch for:
- Discretionary spending: This is the first budget to try and follow August’s Budget Control Act. That’s the legislation that ended the debt-ceiling standoff, and which imposed caps cutting discretionary spending by $900 billion over the next decade. This is administration’s opening bid in how to apportion the now-scarce funds for discretionary spending. Look for almost everything but R&D to get the axe, and discretionary spending in general — which includes both defense and non-defense spending — to fall to its lowest levels since Eisenhower.
- The broken deficit promise: This is one of those cases in which what’s important will make headlines. The Obama administration is officially breaking its promise to halve the deficit by the end of their first term. The 2013 budget envisions a deficit of more than $1 trillion — not halved by any stretch of the imagination. Republicans are right about that. But fulfilling that promise — which would have meant moving to massively contractionary fiscal policy over the last year — would have been a dumb thing to do. The Obama administration is right about that.
-Taxes: One little-noticed shift in the last year is that the Obama administration has stopped hiding the full extent of their preferred tax increases. When they released their April deficit plan, it included a bit more than $700 billion in taxes over 10 years. But it assumed another $800 billion or so from the expiration of the Bush tax cuts in its baseline. That allowed them to make the role of taxes in their budget plan look smaller. At the time, they argued their plan included $3 in spending cuts for every $1 taxes. Now the White House is adding both sets of tax recommendations together and touting $1.5 trillion in new taxes, and a 2.5:1 ratio. It’s clear evidence that they think they’re winning on the tax issue.
- One big deficit-reduction plan: An important argument in this budget is that all deficit reduction needs to be seen as part of the same pot. So in their $4 trillion or so in projected savings, the $2.1 trillion in spending cuts from the debt-ceiling deal are included. Same for the aforementioned 2.5:1 spending cuts-to-tax increases ratio. That’s crucial, the White House believes, because if each deficit-reduction deal is considered separately, then the fact that the first $2.1 trillion was all spending cuts means that the deal overall will be too heavily tilted towards spending cuts. It also explains why they’re so heavy on tax increases in this budget: Many of the needed spending cuts, they believe, have already been passed into law. But none of the necessary tax increases have been passed into law. So the administration will propose hundreds of billions more in cuts to mandatory spending, as that category of spending was largely left out of the debt-ceiling deal, but taxes are the part of deficit reduction that they feel really hasn’t been touched, and so that’s the part they’re focusing on.
- Tax reform: Are we going to get comprehensive tax reform this year? I wouldn’t bet on it. But the looming expiration of the Bush tax cuts makes it more likely than it would otherwise be. And while the Obama administration won’t present a detailed vision for tax reform, they will present a more detailed set of negotiating principles for it. Ten months from now, if Congress decides to try and resolves the Bush tax cuts by reforming the tax code, that section of the budget could come to matter quite a bit.