Obama’s 2012 Budget Proposal – What It May Include

[Updated Feb 14 2011] President Obama has officially released his administration’ $3.7 trillion fiscal budget blueprint for 2012, which will result in a $1.65 trillion deficit (10.9% of GDP) in the current fiscal year – the largest dollar amount in U.S. history. With cutting the federal deficit a big focus, the proposed budget would trim or terminate more than 200 federal programs next year. To promote the other key agenda item – jobs and economic growth – the President has proposed making key investments in education, transportation, infrastructure, clean energy, innovation and research.

Cutting the Debt

To bring down the federal deficit over 10 years, the president is proposing $3.73 trillion in spending in 2012, as “part of a plan that includes budget cuts and tax increases,” reports the Wall Street Journal. Two-thirds of the savings will come from spending cuts and one-third from tax increases. He would increase taxes on the wealthy by limiting the value of their itemized deductions and by allowing the recently extended George W. Bush-era tax breaks to expire in 2012. He would end subsidies for oil and gas companies, and would eliminate certain tax breaks for corporations that do business overseas. And he assumes that Congress will develop a plan to pay for a $556 billion transportation bill, a measure traditionally funded by increasing the federal tax on gasoline.

Still, annual deficits through fiscal year 2021 will add a combined $7.2 trillion to the federal debt, Obama’s budget shows – even after allowing for $1.1 trillion in deficit-reducing spending cuts and tax increases that the president proposes over the 10-year period. As he acknowledges, after 2021, an aging population and rising medical costs will drive deficits again to unsustainable heights.

Future Investments in Education and Research

The president’s budget calls for targeted investments that would increase funding for energy and medical research, expand the tax credit for corporate research and development, pay to train 100,000 new science and math teachers, and fund a wireless network that would bring high-speed Internet access to 98 percent of Americans. The budget calls for $148 billion in overall spending on research and development, which includes $32 billion in biomedical research at the National Institutes of Health. It would create 20 new Economic Growth Zones, providing tax incentives meant to attract investors and employers in hard-hit economic areas.

Medicare, Medicaid and Social Security

The budget does not directly tackle the biggest government spending programs – Medicare, Medicaid and, to a lesser extent, Social Security — whose growing costs are driving projections of unsustainable long-term debt. But President Obama does propose to save $62 billion from Medicare and Medicaid by squeezing care-providers’ reimbursements and expanding federal health programs’ use of generic drugs.

Alternative Minimum Tax Offest

The proposed budget also seeks to prevent many middle-class Americans from being subjected to the Alternative Minimum Tax (AMT), which would raise their tax bills, for three years starting in fiscal 2012. To cover the cost, the administration would put new limits on the ability of the wealthiest earners to utilize tax deductions to lower their tax burden, among them deductions for charitable contributions and mortgage interest.

I will provide more details, feeback and updates on the 2012 budget as they are made available, and you can subscribe (free) via Email or RSS to get notified of the latest news.

Sources : WP, WSJ , NY Mag, NY Times

[Updated following 2011 state of the union (SOTU) speech in which the President outlined initiatives in five areas: deficit reduction; new innovation and green energy; teaching; infrastructure; and a more efficient federal bureaucracy]

President Obama is scheduled to release his fiscal 2012 budget in February  following a very fiscally active 2010. The president’s budget does not have the force of law and mainly functions as a political and symbolic statement of his priorities and an assessment of the economic outlook for the coming year. Like his 2011 budget Congress has to review/approve the majority of proposals and in a number of cases they do not get passed. Case in point, the making work pay credit extension for 2011 and 2012, which was instead replaced by the 2% payroll tax cut.

So what might the president outline in the 2012 budget proposal?  Here are some of the big ticket items that may be included:

Deficit reduction initiatives. With the national debt and its reduction at the forefront of political discussion, both parties have pledged to reduce the deficit that is running at more than $1 trillion a year (and adding to the growing national debt). The President is going to likely include a number of deficit reduction measures in his budget that include extending federal pay freezes (see below), government procurement and a five-year freeze on defense spending and perhaps even some tax increases on the wealthy. He will also allude to various health care savings and cost impacts in 2012 and beyond. Look for the Republicans to provide their own options to reduce the deficit.

Reorganization of government sponsored entities (GSE), Freddie Mac and Fannie Mae. Many associate the bailouts of the now government controlled GSEs as the nadir of the global economic crisis. The administration has promised to lay out a plan for the the future of these companies, following months of industry discussion and potential solutions/impacts. However given the tentative state of the housing market and economy it is unlikely that the budget will contain anything drastic. More likely it will contain a framework for the future of the housing market and what role the GSEs will play, with a likely long term option to spin out the “good” mortgage assets to the private sector, while keeping the “bad” assets and low income mortgage originations within a merged entity.

Reshaping the US [Corporate] Income tax code. The budget provisions are also expected to launch broader debates about reshaping the U.S. corporate tax code to make it simpler, make business regulations less onerous and to bring in more revenue. This could include items like consolidating the tax code into three individual rates and lowering the corporate rate to encourage business’ to hire.  The president decided to pass on tackling the political charged and complex individual tax code prior to his re-election campaign. While tax reform will take much longer than a year and much deliberation in Congress, the President may use the 2012 budget to get the ball rolling by suggesting some initial reforms.

Social Security reform. It also is likely to refer to changes the administration says need to be made to Social Security to secure the system’s long-term solvency as the nation’s population grows older. The budget may put in provisions to extend the retirement age to 68 (by 2050) and to increase the social security wage base (so that higher income earners contribute more). More immediately the President may propose a 2011 $250 SSI check for senior citizen who have seen no COLA adjustment to their payments in the last three years.

Cut Postal delivery from six days to five days, saving the government $8 billion per year in assistance payments. The USPS is meant to be self-funded, but has had to borrow heavily from the federal government over the last few years. Opponents of this move say that it will hinder business and cost thousands of jobs.

Continued freeze of federal pay scales. The president is expected to continue the pay freeze for government workers paid on the general schedule (GS) salary scale. This is expected to provide $28 billion in cumulative savings over the next five years, and more than $60 billion over the next 10 years.

New investments in education and innovation. While new initiatives in the budget will be mainly focused on cost cutting measures, there will be some new spending proposals. Likely Obama’s 2012 budget will announce new programs to promote innovation (though research and development) by offering tax breaks and government funding of green energy initiatives. Education is also an important topic for the President, particularly in the backdrop of the failing education system in America relative to the world. In his SOTU speech, he called on the education system to prepare over 100,000 new math, science and engineering teachers to help future generations compete on a global scale.

What do you the budget should include, and perhaps more importantly what should the President and Congress be thinking about from a financial and economic perspective? Have you say in the comment section below. I will provide more details and updates on the 2012 budget when more details are made available (around mid to late February), and you can subscribe (free) via Email or RSS to get notified of the latest news.

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10 thoughts on “Obama’s 2012 Budget Proposal – What It May Include”

  1. Read this in a CBS article…..the President, Democratic members of Congress and Republican lawmakers seem to agree on one thing: all of them desperately want to get elected NOW, far more then try to solve the nation’s long-term debt problems LATER.

    We know this because neither the President’s plan, nor any Congressional proposals is willing to address the elephant in the room: the 60 percent of federal spending that includes Social Security, Medicare and other entitlements. Because nobody is willing to tackle these big issues, their share of spending is set to constitute 68 percent of spending by 2021. Instead of tackling the big stuff, we are left with the President’s promise to cut $1.1 trillion over the next decade (nice, but just not enough), mostly in non-defense discretionary spending (12 percent of the budget).

  2. Social Security needs a tune-up, not an overhaul. It may make for a great sound bite, but Social Security is not going broke. Come 2037, if Washington were to do nothing, the program would be able to pay out about 75 percent or so of its current benefits. That’s a long way from zero percent.

    The funding gap can be solved without draconian cuts to benefits. Tweaks such as raising the retirement age slightly and lifting the cap on earnings that are subject to Social Security taxes — the 2011 cap is $106,800 — would ensure Social Security stays on firm fiscal footing past 2037, and not in any way be a drain on the federal budget. That is, the payments into the system would cover the payout. In fact, in 2005, Peter Orszag, who went on to serve as President Obama’s director of the Office of Management and Budget, and Peter Diamond, who went on to win the 2010 Nobel for economics, tackled the topic of how to save Social Security in a study for the Brookings Institute. Their conclusion? “Social Security’s long-term financial health can be restored through modest adjustments. Major surgery is neither warranted nor desirable, in our view.”

  3. The Obama administration will not make its Jan. 31st deadline for proposing reforms to the government-sponsored enterprises, an administration official said Monday.

    The official, who spoke on the condition of anonymity, said scheduling had become an issue for releasing the plan this month, and the Treasury Department was now eyeing next month.

    “We should have a report to Congress by mid-February,” the official said. “January is a busy time with the budget and the State of the Union; we just need a little bit more time to get this together.”

    The announcement marked the third time the administration has missed a stated deadline for proposing GSE changes to Congress, raising further doubts that the White House has settled on a plan.

    One critical decision is whether the administration will release a concrete proposal for reforming Fannie Mae and Freddie Mac or simply lay out a compilation of different approaches the government could take.

  4. Obama to Press Centrist Agenda in His State of the union (SOTU) Address (source : NY Times). A good preview for his 2012 budget.

    President Obama will outline an agenda for “winning the future” in his State of the Union address on Tuesday night, striking a theme of national unity and renewal as he stresses the need for government spending in key areas and an attack on the budget deficit.

    Mr. Obama previewed … that his speech would be geared more broadly toward the political center, to independent voters and business owners and executives alienated by the expansion of government and the partisan legislative fights of the past two years. …

    Mr. Obama has signaled that after two years in which his response to the economic crisis and his push for passage of the health care bill defined him to many voters as a big-government liberal, he is seeking to recast himself as a more business-friendly, pragmatic progressive.

    That means emphasizing job creation, deficit reduction and a willingness to compromise in a new period of divided government. But it also means a willingness to make the case for spending — or investment, as many in his party would prefer to call it — in areas like education, transportation and technological innovation … essential to the nation’s long-term prosperity. …

    Without going into detail, he will touch on issues like overhauling the corporate tax code and encouraging exports, and he will defend his health care law. …

    Mr. Obama is unlikely, they said, to embrace the recommendations of a bipartisan majority on the debt-reduction commission he created, which proposed slashing projected annual deficits through 2020 with deep cuts in domestic and military spending, changes to Social Security and Medicare, and an overhaul of the individual and corporate tax codes…

    In general, the theme of deficit reduction will be less prominent in the speech as Mr. Obama emphasizes spending “investments” and “responsible” budget cutting…

    Advisers said the president would describe five “pillars” for ensuring America’s competitiveness and economic growth: innovation, education, infrastructure, deficit reduction and reforming government. …

    “He’s making the transition from an economic security president to an economic growth president,” said Jim Kessler, co-founder of the centrist organization Third Way, “and he’s moving from the left to the center.” …

  5. Did you see Obama’s latest weekly address? He announced GE CEO as head of this advisory group. So we are now to become America Inc…..so much for his democratic ideals. Next he will repeal his own health care reforms!

    ” At the same time, GE has also been investing in innovation, building a clean energy center, an advanced battery manufacturing plant, and other state-of-the-art facilities in Schenectady that are resulting in hundreds of new American jobs and contributing to America’s global economic leadership.

    Leading the world in innovation. Opening new markets to American products. That’s how we’ll create jobs today. That’s how we’ll make America more competitive tomorrow. And that’s how we’ll win the future.

    While I was in Schenectady, I announced that Jeff Immelt, GE’s CEO and one of the most imaginative and visionary business leaders in America, has agreed to head up our new Council on Jobs and Competitiveness. The purpose of this council is to help us find ways to grow our economy by investing in our businesses here at home. And under Jeff’s leadership, I’m confident that they’ll generate good ideas about how we can spur hiring, educate our workers to compete in the 21st century, and attract the best jobs and businesses to America rather than seeing them spring up overseas. “

  6. The problem with Government ‘initiatives’ is they tend to get more complicated and expensive than they’re worth. It’s very frustrating.

    Instead of continuing to freeze federal pay scales, why not FIRE those not working? The same with the post office. I deal with a main post office hub four days a week here in Michigan and, just my opinion, they are some of the laziest and most useless people I’ve met. Throwing money at, or taking from, a problem is rarely an effective solution – just the easiest.

    • I think you are correct. Most people who work for the post office think that they have a job for life. All they have to do is show up on Friday and pick up their paycheck. I have heard that half of them are on disability- mental or physical.

  7. “Obama’s new investments in green energy research and development…Translation: Paying back union bosses and the job-killing green energy scam artists.

  8. The federal government has accumulated more new debt–$3.22 trillion ($3,220,103,625,307.29)—during the tenure of the 111th Congress than it did during the first 100 Congresses combined, according to official debt figures published by the U.S. Treasury.

    That equals $10,429.64 in new debt for each and every one of the 308,745,538 people counted in the United States by the 2010 Census.

    The total national debt of $13,858,529,371,601.09 (or $13.859 trillion), as recorded by the U.S. Treasury at the close of business on Dec. 22, now equals $44,886.57 for every man, woman and child in the United States.

    In fact, the 111th Congress not only has set the record as the most debt-accumulating Congress in U.S. history, but also has out-stripped its nearest competitor, the 110th, by an astounding $1.262 trillion in n

  9. The Republican Party’s effort to shrink the U.S. Federal Government;

    Out of the 15 Departments in the Executive Branch, Republicans created 7 of them;
    3 departments created by Founding Fathers, 5 Departments by Democrats.

    Republicans created these Departments;

    ………..Department ……………….President …………. Employees …………. Budget …….

    Health & Human services ……. …..Eisenhower ………. 67,000 ……..….. $845.4 billion

    Dept of Labor …………………….. ..Taft ……………..…..17,477………….. $126.3 billion

    Dept of Agriculture ………………… Lincoln ………..……. 105,778 ..……….. $132.3 billion

    Dept of Commerce …………..….. T. Roosevelt ………… 141,885 .……….. $14.2 billion

    Dept of Veteran Affairs ………….. H.W. Bush ……….. ….278,565 .…………$87.6 billion

    Home Land Security ……………. Bush ………………… 216, 000* ….……. $52 billion*..

    Dept of Justice ……………………Grant ……..…….…….. 112,500 .………. $46.2 billion

    ( Totals) Departments…. 7………………………. Employees 1,044,682 …….… $1.3 Trillion year

    If you vote for the GOP to reduce social spending, I think you need to find another Political Party.

    Information taken of US Govt websites and Wikipedia. Not all budgets and employees numbers were available for 2010 and 2009 or 2008 were used in their place.

    *Homeland Security is an agency derived from many existing government employees from different Agencies integrated into a new agency.


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