Tuesday, February 14, 2012

Obama's budget: it's about politics, not economics

Business Times - 15 Feb 2012

Obama's budget: it's about politics, not economics


THE way to examine US President Barack Obama's proposed budget for the government's fiscal year of 2013 is by recognising that its main goal - perhaps the only one - is to ensure that Mr Obama remains in the White House in 2013. Indeed, notwithstanding all the admirable plans for stimulating the US economy and narrowing the growing social-economic gap that were included in the president's budget proposal, the chances that the Republican-dominated Congress would embrace them before the November election are very low.

For Republicans, the idea that the federal government should pursue another fiscal stimulus programme or use its power to increase the tax burden on the wealthy in order to help the middle class and the poor are antithetical to their free-market agenda.

Promoting the main themes of his budget proposal (AKA election campaign themes), Mr Obama said on Monday that all Americans should contribute their 'fair share' in taxes and play by the rules. He added that a short-term plan of boosting the economy through federal spending would not be an obstacle to a long-term strategy of controlling the US federal budget deficit. And he cautioned that the kind of massive cutbacks in government spending coupled with tax cuts for the rich that are being advanced by the Republicans could threaten the current recovery and hurt the financially stressed middle class.

'The last thing we need is for Washington to stand in the way of America's comeback,' Mr Obama said. He called on Congress to approve his proposed 2 per cent cut in payroll taxes that would help working Americans and energise the economic recovery. 'Congress needs to stop taxes from going up on 160 million Americans,' he added.

Mr Obama's 2013 budget proposal calls for reducing the federal deficit by US$4 trillion over the next 10 years through major cuts in federal spending, including by slashing the defence budget and by reducing government support for the large retirement and heath insurance programmes, and by raising taxes on people who make at least US$250,000 a year. According to the White House's projection, the federal deficit would fall next year to 5.5 per cent of the GDP from the estimated 8.5 per cent of the GDP this year.

When it comes to increasing government revenues that Mr Obama wants to be raised through taxation - amounting to an increase of about US$1.5 trillion over 10 years - his budget plan calls for allowing the tax cuts for wealthier Americans approved under Republican President George W Bush to lapse by the end of the year. And the Democratic President also wants to ensure that any US household with annual income of more than US$1 million would pay a minimum federal tax rate of 30 per cent and to increase the tax burden on big banks which the White House calls 'Financial Crisis Responsibility Fee'.

At the same time, Mr Obama also called on Congress to approve his proposal for raising more than US$350 billion by extending, and even expanding, the payroll tax and by continuing to support unemployment benefits. He argued that the new revenues could also be used to help rebuild the nation's crumbling infrastructure and help local governments to retain teachers and police personnel. And Mr Obama is also urging Congress to provide new tax credits to small businesses that hire new workers and to the large companies that create jobs in the US.

Indeed, Mr Obama will be trying to convince Americans that his policies are aimed at creating jobs and assisting the middle class while taking steps to control the federal deficit, while all the Republicans want to do is to impose painful austerity programmes on working Americans in the name of reducing the deficits while continuing to help their rich supporters in Wall Street. 'Reining in our deficits is not an end in and of itself,' Mr Obama said, in introducing his budget proposal. 'It is a necessary step to rebuilding a strong foundation so our economy can grow and create good jobs. That is our ultimate goal. And as we tighten our belts by cutting, consolidating, and reforming programmes, we also must invest in the areas that will be critical to giving every American a fair shot at success and creating an economy that is built to last.'

But Mr Obama's plans for short-term stimulus programme and for taxing the rich are igniting the ire of the Republicans. Their presidential candidates would probably bash them as 'European-style socialism' and as 'class warfare'. The White House and the Democrats will respond by portraying the Republicans as the lackeys of the 'fat cats' that brought on the 2008 financial crisis.

Meanwhile, expect Congress to continue passing short-term budget bills and to activate the automatic, across-the-board spending cuts in the months leading to the November election. Ultimately, American voters will decide whether to approve Mr Obama's economic plans or to support the Republican programme.

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