What You Need To Know About President Obama’s New Budget

President Obama will today release a sweeping budget proposal that is aimed at reaching a grand bargain with House and Senate Republicans on the nation’s long-term debt and deficits. The budget, as expected from reports last week, largely mirrors the compromise offer Obama made to Republican leaders during fiscal cliff negotiations at the beginning of the year, as it seeks investments aimed at spurring economic growth and new revenues in exchange for cuts to both domestic discretionary spending and entitlement programs.

The Obama budget replaces the automatic budget cuts — sequestration — that went into effect on March 1 with a total of $1.8 trillion in deficit reduction achieved through a mix of spending cuts and revenue increases, and it also includes many of the administration’s priorities, including stimulative investments, funding for a universal preschool program, and an increase in the minimum wage to $9.00 per hour. But it also includes further spending cuts and changes to entitlement reforms top administration officials say Obama is offering not as an ideal policy package but instead in an effort to reach a long-term budget deal with Republicans. Here is a breakdown of the budget’s key components:

Spending cuts: The budget cuts $200 billion from discretionary spending, balanced evenly between defense and domestic programs. It also includes $200 billion in cuts from mandatory spending by reducing farm subsidies and reforming federal retiree benefit programs. It also achieves $210 billion in savings from reduced interest payments on the debt and $400 billion in health savings aimed at cutting waste and fraud and strengthening Medicare.

Chained CPI: The most contentious of the budget’s provisions is a new inflation measure, known as chained CPI, that will save $230 billion over the next decade. The Obama budget applies chained CPI to all government programs except those that are means tested in an effort to protect programs that benefit the most vulnerable. It does, however, apply to Social Security — meaning certain beneficiaries would see benefit cuts under the reform. The budget also includes protections for low-income seniors to offset those benefit cuts, and senior White House officials said Tuesday that the administration would not accept the reform without those benefit protections. Chained CPI was a key feature of Obama’s compromise plan to Republican leaders in January, and though administration officials asserted that the White House is not necessarily fond of the reform, it was included in an attempt to foster compromise with Republicans who have demanded entitlement reforms in past negotiations.

Taxes: The budget seeks $580 billion in new revenues through the closure of tax loopholes — including oil and gas subsidies and tax credits that benefit companies who shift jobs overseas — and by limiting deductions for wealthy taxpayers. It also closes loopholes Obama has targeted before, including the corporate jet loophole and one that benefits wealthy hedge fund managers. It also institutes the Buffett Rule, a plan named for wealthy investor Warren Buffett that would institute a minimum income tax rate on millionaires. Meanwhile, it makes permanent the America’s Opportunity Tax Credit that goes to families with children in college, improves the Child and Earned Income tax credits, and gives tax cuts and other breaks to small businesses, all of which it pays for by closing tax loopholes.

Job creation: The budget includes a modest amount of stimulative investments, many of which were derived from Obama’s American Jobs Act that the GOP blocked in 2011. It has $50 billion in infrastructure investments, $1 billion to launch manufacturing innovation programs, and increases for research and design. It also includes education investments and funding for job training programs.

Universal preschool: Following up on a promise made in his State of the Union address, Obama’s budget includes funding to expand preschool programs to low-income children. The program, funded by increased tobacco taxes, would help expand preschool enrollment among four-year-olds by partnering with states to subsidize preschool for children in families who earn up to 200 percent of the federal poverty line.

In total, the budget represents a sharp move to the center for Obama, who embraced entitlement reforms unpopular among his base while also including $2 in spending cuts for every $1 in revenues. The budget would bring the total deficit reduction achieved in the last four years to more than $4 trillion, the vast majority of which has already been through spending cuts and not revenues. Overall, it reduces deficits to 2.8 percent of the economy in 2016 and 1.7 percent by 2023.


And while it focuses more on job creation, infrastructure, and other important long-term investments than Republicans have, it achieves less in both stimulus spending and revenues than budgets offered by House and Senate Democrats, and it still focuses largely on reducing the deficit at a time when America’s borrowing costs are historically low and unemployment is persistently high. Administration officials said Tuesday that the budget proves that both deficit reduction and job creation could be achieved at the same time, but job growth remains slow and deficit reduction efforts have thus far hindered the economic recovery compared to past post-recession periods, begging questions about whether further spending cuts should be the focus at all. Focusing solely on stimulus and job creation, though, is out of the question with the very Republicans with whom this budget is seeking to compromise.