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President Barack Obama drew a line in the sand on budget caps during his weekly address to the country. Citing the latest employment report to argue that the economy has improved, he threatened to veto any budget produced by the Republican-controlled Congress that keeps spending in check.
Most Republican presidential candidates have expressed a willingness to get rid of the budget caps put in place by the Budget Control Act of 2011. Likewise, as Josh Withrow recently explained, Republican leaders in Congress are looking for ways to undermine the caps. While the Budget Control Act was not perfect, it is the only meaningful accomplishment since 2011, when Republicans took control of the House of Representatives, that limits government.
The Budget Control Act did not cut spending, but rather the rate of spending increases. "Between 2012 and 2021 with sequestration, defense increases 16% (vs. 24%); nondefense discretionary increases 4% (vs. 9%); Medicare increases 71% (vs. 74%); and net interest increases 180% (vs. 200%)," Veronique de Rugy wrote at the Mercatus Center in November 2011. "As we can see, under sequestration, spending in each categories would go up. The only reduction would be a reduction in the growth rate of spending—which is quite different from a spending cut."
Republicans have already shown signs of caving on the budget caps. The budget deal crafted by Rep. Paul Ryan (R-Wis.) and Sen. Patty Murray (D-Wash.), chairs of the respective congressional budget committees, blew threw the budget caps by $63 billion. This time around, with Republicans once again faltering on their purported commitment to keep spending in check, Democrats have already threatened a government shutdown if they do not get their way on spending, and President Obama has joined them.
"As always, the deadline for Congress to pass a budget is the end of September. Every year. This is not new. And if they don’t, they’ll shut down the government for the second time in two years," President Obama said. "At a time when the global economy faces headwinds and America’s economy is a relative bright spot in the world, a shutdown of our government would be wildly irresponsible. It would be an unforced error that saps the momentum we’ve worked so hard to build. Plain and simple, a shutdown would hurt working Americans."
"It doesn’t have to happen. If Congress wants to support working Americans and strengthen our middle class, they can pass a budget that invests in, not makes cuts to, the middle class. If they pass a budget with shortsighted sequester cuts that harm our military and our economy, I’ll veto it," he added. "If they make smart investments in our military readiness, our infrastructure, our schools, public health, and research, I’ll sign that budget – and they know that."
President Obama mentioned the August employment report, the data of which showed 173,000 jobs added and an unemployment rate of 5.1 percent, as part of his argument to eliminate the budget caps. But all is not as it seems. For example, the labor force participation rate -- the percentage of Americans available for work -- is at 62.6 percent, a 38-year low. When tens of thousands of people exit the labor market, unemployment is bound to drop. Additionally, economic problems in China and Europe have many worried about the next downturn.
Furthermore, while budget deficits are fell this fiscal year to $426 billion and will drop to $416 billion next fiscal year, they will begin to creep up gradually beginning in FY 2017, according to the Congressional Budget Office (CBO). By FY 2020, the budget deficit will be $687 billion and $1 trillion by 2025. Between FY 2016 and FY 2025, total deficits will exceed $7 trillion. These are, of course, short-term figures. Looking at the long-term, the United States' fiscal situation is much more ominious, largely due to the growth of entitlements. The public's share of the debt as a percentage of gross domestic product is expected to rise from 74 percent in FY 2015 to 103 percent by FY 2040.
"At some point, investors would begin to doubt the government’s willingness or ability to meet its debt obligations, requiring it to pay much higher interest costs in order to continue borrowing money. Such a fiscal crisis would present policymakers with extremely difficult choices and would probably have a substantial negative impact on the country. Unfortunately, there is no way to predict confidently whether or when such a fiscal crisis might occur in the United States," the CBO explained in June. "But all else being equal, the larger a government’s debt, the greater the risk of a fiscal crisis."
Contrary to what some may say, this is not a tax revenue problem. By 2025, the tax revenues will hover around 18.3 percent of the economy, which, as the CBO noted, is "a greater share of the economy than their 50-year average." Getting a handle on the growth of federal spending is not only a short-term effort. By cutting the rates of spending increases, the Budget Control Act simply scratched the surface. Eliminating the budget caps may be the most fiscally irresponsible thing President Obama and Congress can do short of creating a new, unsustainable entitlement program to go alongside the others that are the drivers of the United States' deficits. And