Guest post by Lena Rizkallah (learn more about Lena at the end of this post)
Valentine’s Day was two weeks ago. It was also the day that President Obama released his 2012 Budget, but despite all the proposed tax and spending cuts that would reduce the deficit by $1.1 trillion by 2021, the President got no love from Congress.
In order to meet the deficit reduction goal in the next decade, the President intends to allow the Bush tax cuts to expire after 2012 for families who make $250,000 or more, and to bring the estate exemption and estate tax to 2009 levels (back to a $3.5 million estate exemption and 45% estate tax). Among the various cuts, his budget also proposes to limit certain itemized deductions on mortgage interest and charitable deductions and repeal LIFO, an accounting treatment for inventories. The President has also been a proponent of charging major banks a financial disaster crisis fee, and this was included in the budget. Among the spending cuts, the budget proposes to cut heating assistance for low-income families and cuts to other community assistance programs, and impose a five-year freeze on domestic spending.
To many Congressional leaders, especially Republicans, the budget falls short of taking the necessary and serious deficit reduction measures. The spending cuts proposed by the President only applied to the discretionary portion of the budget, at 12% of the budget, a small percentage of overall spending. It has become increasingly clear that the biggest systemic risk and fastest growing threat to our overall budget and deficit is the portion that must be paid for entitlements. Social Security, Medicare, Medicaid, unemployment insurance and veteran’s benefits—all make up the entitlement programs of the US government, and these mandatory nondiscretionary payments take up almost 60% of overall annual spending. Yet the President failed to tackle this issue—most likely for controversial political reasons–but this is the elephant in the room that refuses to go away.
The deficit has become a hot topic lately. This is surprising on the one hand, and on the other, not so much. For one thing, during the last recession, it was widely believed that the government’s most important issue was the economy, and reviving the economy was the top priority. Congress and the President should do whatever it takes to get people back to work, the housing market back to life and the economy back on track. However, the Recession has proven to have outsmarted Congress, and no matter what they did—throw money at it, cut interest rates, buy more bonds—the US economy sputtered along.
Things are better now—officially—and the Great Recession was declared over in June of 2009. Yet unemployment remains staggeringly high, the housing market alarmingly low, the stock market pretty cantankerous. And along with the challenges of a prolonged and sluggish recovery, we the taxpayers are left with a sky-high deficit.
In 2008, the annual deficit was about $455 billion. In 2009, because of outflows to pay for TARP, bail out Fannie, Freddie and AIG, and other government stimulus programs, the deficit almost tripled to $1.4 trillion. This is equal to over 9% of GDP, an alarmingly high statistic, and at that time, the highest deficit to GDP since World War II.
Since then the deficit has remained in the trillions (next year the deficit is projected to reach $1.6 trillion and 11% of GDP!!!), and will continue to stay at high levels unless something drastic is done. Government spending, stimulus, and reduced tax revenues from property and income tax contributed to the increasing deficit, and the recently enacted comprehensive tax bill, which extended the Bush tax cuts and increased the estate exemption, is likely to add to the deficit since the total bill–$858 billion—was unfunded.
The good news, however, is that people are now talking about the deficit– and not just when a microphone is stuck in front of their face and the cameras are on–but actually behind closed doors and away from the public eye. The newly elected Republican freshmen in the House have established themselves as a somewhat fearless group, relatively unaffiliated with the established House GOP, and they believe that their constituents elected them with a mandate to control the exploding deficit. They want to make drastic cuts to spending and are not afraid to talk about entitlement reform.
Other House Republicans are also set to make cuts, albeit limited to the discretionary spending budget. President Obama’s budget proposed $41 billion in cuts from last year’s budget, and the House Republicans have passed amendments to surpass that number and cut $60 billion from the budget. The House freshmen want to do better, working to make about $100 billion in cuts.
In the Senate, a group of bipartisan Senators have been working to come up with their own budget amendments, including entitlement reform. Borrowing from the recommendations of the deficit commissions, they have been facing the tough questions of entitlement reform, proposing to separate discretionary and nondiscretionary spending, and imposing caps on each in order to make it difficult to borrow or cut spending from one in order to balance the other. The scary question is whether Congress can come to a consensus on the budget–in the short-term as well as for 2012–or whether we are headed for a government shut-down in a few days.
The meetings, debate and proposals are various means to an end and hopefully to some concrete resolution, but one thing is for sure. From the White House to Capitol Hill, there is a flurry of activity, brainpower and even—dare I say—bipartisanship happening in order to cut spending, balance the budget and bring the deficit under control. It’s nice to see them hustle.
About the author
Lena Rizkallah of Mosaic Consulting is an attorney who focuses on legislative developments, tax and fiscal policy, and advanced strategies for investment and retirement planning and products. She also writes and presents on trusts, estate planning and charitable giving arrangements.