REPORT | September 2017 OBAMA¢â‚¬â„¢S FISCAL LEGACY ... 5 Obama¢â‚¬â„¢s Fiscal Legacy | A Comprehensive Overview

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  • REPORT | September 2017

    OBAMA’S FISCAL LEGACY A Comprehensive Overview of Spending, Taxes, and Deficits

    Brian Riedl Senior Fellow

  • Obama’s Fiscal Legacy | A Comprehensive Overview of Spending, Taxes, and Deficits

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    About the Author Brian Riedl is a senior fellow at the Manhattan Institute and a member of the institute’s E21, focusing on budget, tax, and economic policy. He previously served as the chief economist to Senator Rob Portman (R., Ohio) and as staff director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth. Riedl also served as a budget-policy advisor to the Romney (2012) and Rubio (2016) presidential campaigns.

    Riedl’s writing and research have been featured widely, including in the New York Times, Wall Street Journal, Washington Post, Los Angeles Times, and National Review. He is a frequent guest on NBC, CBS, PBS, CNN, Fox News, MSNBC, and C-SPAN. Riedl holds a B.A. in economics and political science from the University of Wisconsin and an M.P.A. in public affairs from Princeton University. Follow him on twitter @Brian_Riedl.

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    Contents Executive Summary ..................................................................5 $4.6 Trillion in Additional Federal Deficits ..................................7 Higher Deficits Were Not the Result of the

    Weak Economic Recovery .........................................................8 $5 Trillion in New Legislation ....................................................9 The Two Presidencies of Barack Obama .................................12 Who Gets Credit for Fiscal Restraint? ......................................12 The Missed Opportunity .........................................................14 The Evolving Federal Budget ...................................................14 Obama’s Long-Term Budget Legacy ........................................15 Conclusion .............................................................................16 Appendix ...............................................................................17 Endnotes ...............................................................................22

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    Obama’s Fiscal Legacy | A Comprehensive Overview of Spending, Taxes, and Deficits

    Executive Summary

    Barack Obama’s budgetary record has already been a subject of intense debate. The president’s defenders1 assert that he inherited a daunting $1.2 trillion budget deficit and eventually cut it in half; that he responsibly raised tax rates on upper-income Americans, expanded health-care spending, and trimmed the defense budget. Finally, they argue that Obama pulled America out of a severe recession and built a seven-year economic expansion.

    Critics2 respond that the president’s runaway spending slowed down what should have been even faster deficit reduction and that the national debt rose from $11.5 trillion to $20 trillion, despite tax increases on upper-in- come families, small businesses, investors, smokers, and the health industry. They argue that this has been the weakest economic recovery since the 1940s, with wages stagnating.

    The end of the Obama presidency now allows for an overall assessment of taxes, spending, and deficits during his years in office. The analysis in this paper begins with the 10-year budget baseline that Obama inherited in January 2009, and it measures subsequent tax and spending changes through the January 2017 baseline that was released as he left office. The data come from more than 20 Congressional Budget Office (CBO) baseline updates over the administration’s eight years, supplemented with the line-item scores of approximately 110 major bills that Obama signed into law.3

    Here are the key findings:

    The cumulative 2009–19 budget deficits are set to end up at $8.93 trillion—$4.6 trillion higher than projected for the same time period when Obama took office. This consisted of $5 trillion in new legislation, partially offset by $400 billion saved by economic factors and technical changes.

    The economy grew more slowly over this decade than had been projected in 2009. Yet far from deepening the budget deficits in the Obama years, the slower economic recovery and technical changes actually saved $400 billion over the decade, relative to the January 2009 baseline, as lower tax revenues were offset by lower interest payments on the national debt, the result of recession-dampened interest rates.

    New legislation cost $5.0 trillion over the 2009 –19 period. However, $4.1 trillion of this cost came from basic extensions of expiring tax relief. Economic stimulus added $2.0 trillion in costs, and discretionary spending caps and mandatory sequestrations saved $800 billion.

    The Affordable Care Act (ACA) has reduced the 2009 –19 budget deficit by $275 billion, as its steep tax increases and Medicare cuts exceeded the cost of new health benefits. At the same time, the law has made balancing the long-term budget more difficult by using most of the tax increases and Medicare cuts to finance a new entitlement rather than deficit reduction—thus leaving fewer options for future lawmakers to close the growing budget deficit.

    The combination of expanded entitlements and the tight discretionary spending caps reduced discretionary spending from 38% to 31% of all federal spending.

    Virtually all net spending increases during the Obama administration were enacted during 2009–10, when Democrats controlled Congress. During the following six years, with a Republican House and eventual Republican Senate, $889 billion in net spending cuts were enacted, excluding legislation that simply extended expiring policies. A common conservative complaint that the 2011–16 Republican House (and then Senate) acted as a rubber stamp for Obama spending is without merit. The president’s expensive new proposals collided with a Republican Congress, producing gridlock.

  • Obama’s Fiscal Legacy | A Comprehensive Overview of Spending, Taxes, and Deficits

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    Obama’s Fiscal Legacy | A Comprehensive Overview of Spending, Taxes, and Deficits

    Obama leaves behind a budget with higher entitlement spending, lower discretionary spending, and (temporarily) lower net interest costs than originally projected. The ballooning national debt means taxpayers will be liable for exorbitant debt service costs when interest rates return to normal levels.

    Over the long term, the president’s most consequential budgetary legacy was the worsening entitlement picture. The president failed to shore up the finances of Social Security, Medicare, and Medicaid, and then added a new health-care entitlement (ACA). As a result, retiring baby boomers and rising health-care spending threaten to eventually overwhelm the federal budget.

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    OBAMA’S FISCAL LEGACY A Comprehensive Overview of Spending, Taxes, and Deficits

    $4.6 Trillion in Additional Federal Deficits Upon taking office in January 2009, President Obama inherited a budget deficit that had soared from $161 billion in 2007 to a recession-slammed $1.186 trillion estimate for 2009. The January 2009 CBO baseline budget projection for 2009–19—which already incorporated the effects of the year-old recession in its projections—estimated that a strong economic recovery and the expiration of certain tax cuts would return the annual budget deficit to approximately $260 billion by 2012. In other words, the projections assumed that the high recessionary deficits would quickly fall back to earlier levels. Overall, CBO estimated that there would be $4.32 trillion in total budget deficits over the decade.

    That is not what happened. Figure 1 shows that, as Obama left office, the 2009–19 budget deficits were now estimated to total $8.93 trillion—more than double the initial projections. Annual budget deficits remained above $1 trillion through 2012, fell to $438 billion by 2015, and have since begun rising once again. While current deficits of 3% of the Gross Domestic Product (GDP) are not historical- ly atypical, they are significantly higher than the default baseline when Obama took office.

    These deficits also exceeded the president’s own targets. A month after his inauguration, Obama pledged to “cut the deficit we inherited by half by the end of my first term in office.”4 Instead, the inherited $1.186 trillion was pushed up to $1.413 trillion by 2009 stimulus legislation, and then

    remained over $1 trillion throughout the president’s first term (Figure 2). It was not until 2014 that the budget deficit fell to half the inherited level in nominal dollars (2013, if measuring by percentage of GDP).

    Had the president and Congress simply stuck to CBO’s original budget baseline legislatively (even

    FIGURE 1.

    Obama Deficits Exceeded the 2009 CBO Baseline by $4.6 Trillion

    Source: For original 2009 projections, see CBO, “The Budget and Economic Outlook: Fiscal Years 2009 to 2019,” Jan. 7, 2009. For actual 2009–16 deficits, see Office of Management and Budget (OMB), Historical Tables, Washington, D.C. (May 2017), Table 1.1. For the 2017–19 deficit projections when Obama left office, see CBO, “The Budget and Economic Outlook: 2017 to 2027,” Jan. 24, 2017.

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    CBO Baseline Deficit, January 2009

    Actual Budget Deficits

    Fiscal Year 2006 2019’18

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