The 2012 Budget

Today, the President sent to Congress his budget  for the 2012 fiscal year. This document is built around the simple idea that we have to live within our means so we can invest in the future. Only by making tough choices to both cut spending and deficits and invest in what we need to win the future can we out-educate, out-build, and out-innovate the rest of the world.

This is the seventh Budget that I have worked on at OMB, and it may be the most difficult. It includes more than $1 trillion in deficit reduction – two-thirds from spending cuts -- and puts the nation on a path toward fiscal sustainability so that by the middle of the decade, the government will no longer be adding to our national debt as a share of the economy and will be paying for what it spends – and will be able to sustain that for many years afterwards.  

The President has called this budget a down payment because we will still have work to do to pay down the debt and address our long-term challenges. But it is a necessary and critical step for we cannot start to move toward balance and to cutting into the size of our debt until we first stop adding to it – and that is what this Budget does. 

It lays out a strategy for significant deficit reduction – the most deficit reduction in a comparable period since the end of World War II – that will bring our deficit down to about 3 percent of the economy by the middle of the decade and maintain it there for the rest of the budget window. Changing the trajectory of our fiscal path is a significant accomplishment, but to do this, it will take some tough choices. Let me highlight a few of them:

The Budget includes a five-year non-security discretionary spending freeze that will reduce the deficit by over $400 billion over the next decade and bring this spending to the lowest level since President Eisenhower sat in the Oval Office. To achieve savings of this magnitude it is not enough to cut programs that are outdated, ineffective, or duplicative – though that is where we need to start.  It is also necessary to make cuts in places that, absent the fiscal situation, we would not reduce – such as energy assistance and community development grants for cities and counties.

In national security, which we are not freezing, we also are making real cuts. Defense spending has been growing faster than inflation for more than a decade, and we can no longer afford to stay on that path.

The Budget cuts $78 billion from the Pentagon’s spending plan over the next five years, bringing defense spending down to zero real growth. It cuts weapons programs that Secretary Gates and the military leadership say we do not need and which we cannot afford. We are also capturing the savings that come from bringing our troops home from Iraq, which when added in brings defense spending down by more than 5 percent from the President’s FY 2011 request.

Of course, cutting discretionary spending alone will not solve our fiscal problems. This Budget also deals with mandatory spending and revenue and takes significant steps to address our long-term fiscal challenges.

For example, this budget shows how we can pay for solutions to two problems that we have been too willing to kick down the road by putting on the national credit card: preventing a nearly 30 percent cut in reimbursements to doctors in Medicare to keep doctors in the system treating patients; and preventing an increase in taxes on middle-class families through the Alternative Minimum Tax or AMT.

In December, there was a bipartisan agreement to pay for a one-year extension of the so-called “doc fix” – which was not required by budget rules but was the right thing to do. Building on that, our budget identifies $62 billion of specific health savings to pay for the next two years of this fix – establishing a clear pattern that, consistent with our budget, this needs to be paid for in the future.

With regard to the AMT, we pay for three years of a patch by limiting the amount those in the highest tax bracket can receive for their itemized tax deductions. By bringing the rate back to where it was in the Reagan Administration, this is the biggest reduction in revenue-side spending in 25 years. This proposal is consistent with the Fiscal Commission’s recommendation that we start to cut back on spending in the tax code, and if we continue on this path of paying for the AMT patch, after 2014, it will reduce the deficit by 1 percent of GDP by the end of the decade.

These both are down payments on long-term reform to reduce the deficit further, and the Administration looks forward to working with Congress to permanently covering these costs once and for all.

Similarly, as the President said in the State of the Union address, we are eager to work with the Congress on deficit-neutral, corporate tax reform that will simplify the system, eliminate special interest loopholes, level the playing field, and lower the corporate tax rate for the first time in 25 years.

And while it does not contribute to our deficits in the short- or medium-term, the President has laid out his principles to strengthen Social Security and has called on Congress to work on a bipartisan fashion to keep this compact with future generations.

As we take these steps to live within our means, we also invest in the areas critical to future economic growth and jobs creation: education, innovation, clean energy, and infrastructure. And even in these areas, the budget cuts programs in order to fund high-priority investments.

For instance, in education we maintain the increased maximum Pell Grant level that we instituted, helping 9 million students afford college. We pay for it with $100 billion in savings, primarily from eliminating summer school Pell awards and the graduate student in-school loan subsidy.

In the area of innovation, we support simplifying, expanding, and making permanent the R&D tax credit, $148 billion in R&D investments -- including a robust $32 billion for NIH -- and meeting visionary goals to bring about a new clean energy economy. To help pay for these investments, lower priority programs are cut, and we eliminate 12 tax breaks to oil, gas, and coal companies that will raise $46 billion over 10 years.

And to build the infrastructure we need to compete, the Budget increases our annual investment by $35 billion a year, which is a 60 percent increase over the last surface transportation reauthorization bill. Not only does this plan consolidate 60 duplicative, often earmarked programs into five and demands more competition for funds, but we insist that this bill be paid for -- and we look forward to working in a bipartisan manner to do that.

In my last tour of duty here in the 1990s, we made the tough, bipartisan decisions needed to bring our budget into surplus. Once again, it will take tough choices  to put us on a sustainable fiscal path. But we should not settle for shortcuts. We need to be true to our values and make the right investments to win the future. As we make these choices, it is critical that we do not cut areas that are essential to helping our economy grow and making a difference for families and businesses. After all, a growing economy where more Americans are working is the best way to reduce our deficits and debt. It is the wind we need at our backs for this already difficult journey.

Another  clear lesson in working in the Congress and here at OMB is that cutting spending and cutting our deficits requires us to put political differences aside and work together. It takes putting the country ahead of party, and the next generation ahead of the next election. Along with the entire Administration, I standready to do that and look forward to working with both sides on Capitol Hill to crafting a set of policies that enable us to live within our means and invest in the future.

Jack Lew is the Director of the Office of Management and Budget.