The more we dig into the bones of President Obama's new budget plan, the more it becomes clear that, as JP Morgan's Michael Cembalest notes, the battles of the future (among our peak-polarized political class) will be between raising taxes and cutting entitlements as the discretionary spending well is empty. As the Budget Control Act cuts this discretionary spend to a 50-year low (close to only 5% of GDP), it is the rise in entitlements (and of course interest costs) that appear mandatory for now and will need to be 'balanced' with tax revenue growth that is expected to rise from 15% of GDP to 20% of GDP by 2022 (thanks largely to a belief that cyclical recovery will save us). As the real ranks of the long-term unemployed and now disabled benefits receivers swell, it seems clear how the entitlement-taxation see-saw will swing unless there is change everyone can believe in.
JP Morgan. The President's Budget - An Unhappy Valentine's Day Card
The battles of the future, after the discretionary spending well is empty
The Administration projects that tax revenues will rise from their current 15% of GDP to 20% by 2022, and that spending will decline from 24% of GDP to 23%. Both numbers need to be dissected in order to make sense of them. The projected revenue increase is as much from an assumed cyclical recovery as it is a product of tax legislation. Secondly, the modest decline in spending as a % of GDP obscures cuts in some categories and increases in others: the Budget Control Acts cut discretionary spending to a 50-year low close to 5% of GDP, but is offset by continually rising entitlement and interest costs (mandatory items). Budget negotiations of the future are likely to revolve around the tradeoffs between tax revenue increases and entitlement reform. The discretionary spending well is empty.
