CBO: Obama budget would hinder long-term growth

WASHINGTON -- A new analysis concludes that President Obama’s 2013 budget would bolster the economy in the short term and hinder growth in later years, igniting a fresh round of debate as Democrats and Republicans offer competing economic visions heading into the fall election.

The nonpartisan Congressional Budget Office found that Obama’s proposal would boost the nation’s gross domestic product by 1.4% beyond what is expected under current law, primarily because the White House plan would extend certain tax breaks that are set to expire this year. Extra cash in the pockets of Americans would help boost demand, stimulating the economy.

“People’s disposable income and their demand for goods and services would be greater,” the report says.

But after 2017, as economic growth likely would push up interest rates, the weight of annual deficits would become a drag on growth. The federal deficit for 2012 is expected to be $1 trillion, lower than in recent years, but still contributing to the nation’s high debt load. The budget office estimated that GDP could be reduced by as much as 2.2% between 2018 and 2022.

“The president’s budgetary proposals would boost the nation’s output initially but reduce it in later years,” CBO wrote on its Directors’ Blog.

The White House budget proposes what Obama calls a “balanced approach” of new taxes on wealthier households, including those earning more than $1 million a year; continued tax breaks for the middle class; and trims in federal spending.

House Speaker John A. Boehner (R-Ohio) seized on the CBO analysis to criticize the administration and amplify the Republican budget alternative, which would cut taxes -- including for the wealthy -- slash spending and dramatically revamp Medicare and other social safety net programs.

“It’s official: President Obama’s idea of a ‘balanced approach’ leads to an unstable economy,” Boehner said. “This CBO report confirms the president’s policies will hurt long-term job creation and economic growth, and proves we have to do everything possible to stop Washington from spending money it doesn’t have, get control of our debt and get government out of the way.”

The budget office had previously reported the rising deficits under Obama’s proposal, compared with current law that would allow George W. Bush-era tax breaks to expire and impose steep federal spending cuts, including reductions in defense spending that many in Congress hope to reverse. Deficits under Obama’s proposal would grow by more than $6 trillion over the decade. Republicans estimate their budget would produce deficits of roughly $3 trillion over the same period.

The state of the economy is the premier battleground in the race for the White House and control of Congress, as the nation’s unemployment rate remains historically high and the economy continues a sluggish post-recession recovery. To many voters, the federal deficit remains a troubling worry, particularly among sought-after independents and those who align with the tea party movement.

Congress has become a key venue for these debates as the House and the Senate are conducting votes on measures that showcase the parties’ competing approaches on fiscal matters.

The House this week, for example, approved a 20% business tax break that Obama has said he would veto because it favors the wealthy. Obama’s proposed “Buffett rule” tax rate on those earning more than $1 million was blocked in the Senate by Republicans.

Even though none of the bills are expected to become law in the divided Congress, the parties are setting the stage for after the November election, when key issues will face deadlines: In December, tax cuts established during the Bush era expire, which would lead to a tax hike on Americans across the income scale. At the same time, federal spending cuts mandated by last summer’s debt deal would begin in January, slicing across almost every aspect of government.

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Original source: CBO: Obama budget would hinder long-term growth