The “Increasing” 2012 Budget?

Last November, voters made it clear that they don’t want huge budget deficits. This is hardly surprising. A significant fraction of the population had just experienced foreclosure, bankruptcy, and all the other unpleasant consequences of over-spending. They were voting from experience.

Washington has responded with a variety of budget cutting proposals ranging from $100 Billion on the high end to next to nothing on the low end.

Today Obama proposed his 2012 budget of “tough choices and sacrifices.” According to CNBC, these tough choices would actually increase the deficit for the next two years and decrease it for the eight following years. This is a fun way to fix budget problems. You can spend all you want this year as long as you add some money saving propositions that may take effect far in the future unless the next administration decides differently.

In order to make the proposed budget more accessible, we have rescaled the $3.7 Trillion of proposed spending to $100, a number you and I are more familiar with. The table summarizes the rescaled Obama budget.

Obama’s 2012 Budget
Discretionary Security $24
Discretionary Non-Security $12
Mandatory Social Security $20
Mandatory Medicare $13
Mandatory Medicaid $7
Mandatory TARP $0
Mandatory Other $16
Interest $6
Disasters $0

Only $58 of this $100 budget are paid for by (expected) tax receipts and other revenue.That is just enough to cover the mandatory spending, i.e. the entitlement programs Social Security, Medicare, etc. Everything else, the wars, roads, schools, science, is paid for from borrowed money.

The budget cuts on the table in Washington amount to virtually nothing on this scale. A cut of $100 billion takes about $3 out of the rescaled budget. Nice, but it doesn’t make much of a dent in the $42 shortfall.

None of the political parties appear to be interested in tackling this crisis. Instead they put on a show about pocket change to convince the voters that they are addressing the issues.

Most of the ‘tough choices and sacrifices’ in Obama’s budget are on the $20-$30 billion scale (about $1 in terms of our rescaled budget). They are far too small to address the budget crisis.

For someone who finds saving $1 out of $100 a tough sacrifice, closing a budget gap of $42 would be a disaster of unimaginable proportions. However, eventually someone will have to make the truly hard choices required to bring the budget under control. It is unsustainable to use all tax receipts for mandatory spending. In order to have something left over to fund legitimate functions of government, taxes must rise sharply and payments for entitlement programs must decrease significantly. The only question is how much of which will happen.

Posted by Martin Gremm (Pivot Point Advisors)

About the author

Marc Schindler, CFP®

One Comment

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  • I have recently been told by a few people that there will be no Earned Income credit for the year of 2012 is this true. I like to know the coreecrt facts and not just what i am told by others starting rumors, if you could get back to me this would be greatly appreciated. thank you. shauna

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