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February 3, 2015

Could the president’s budget put us on an optimistic path for long-term growth?

February 3, 2015

With the release of President Obama’s fiscal 2016 budget proposal, much of the conversation inside the Beltway will be about politics: specifically, how Republican control of Congress may have affected what’s in the budget and whether the proposals have even a chance of passing.

At Urban Institute’s 26th annual Roundtable on the President’s Budget, economic policy experts instead discussed whether the proposals were in fact good policy. Participants included politicos, professors, and policy analysts, representing diverse political and ideological perspectives. The conversation was expectedly wide-ranging, with some key points of agreement and debate.

Amid that discussion, one speaker extracted—perhaps unexpectedly—some potential optimism within the budget relating to long-run productivity growth. How did she get there?

No major disagreement arose about the economic assumptions and projections in the president’s budget (though many noted how tentative any estimate must be). Those projections showed the federal debt and deficit remaining roughly stable over the short and medium term.  Still, since the debt-to-GDP ratio would remain at an all-time high since the end of World War II, some expressed concern that high levels of debt and interest costs can have negative effects.

For example, with a high debt ratio, we have little flexibility to respond with fiscal stimulus when another recession hits. Participants also mentioned that with non-defense discretionary spending at 50-year lows, we currently dedicate extremely high shares (as much as 90 percent) of that discretionary spending to debt interest, necessarily crowding out other investments. Over the next decade or so, the president’s budget will do little to change that balance.

However, as that speaker pointed out, many proposals offer potential for higher economic growth, a partial way out of the dilemma. Long-term debt and deficit projections are highly sensitive to modest changes in economic productivity: the amount of economic activity we generate relative to government spending. 

Buried in OMB analysis of the budget proposal are charts that show that modestly different levels of economic productivity can change thelong-term outlook dramatically. Depending on whether we have low or high growth, by 2060 we could either much have higher public debt or a modest surplus.

And, as one participant said, the president’s budget includes many proposals that might ensure long-run “productivity and health growth as a way to mitigate” the long run debt-to-GDP ratio. Those policies include expanding access to pre-kindergarten and higher education for broader swaths of the population; expanding access to child care to help parents work and kids grow; and changing work incentives like the earned income tax credit, parental leave, and the minimum wage to bring workers into the labor force and raise standards of living.

If those proposals expanded productivity, they would help move the economy closer to these more optimistic growth curves in the long run, even if they do nothing this year to lower the deficit.

The question remains whether the policies would actually achieve those goals. Some speakers around the table expressed doubt, partly because other major parts of the budget—for example, entitlement spending— could be moving in the opposite direction.

But another point of optimism focused on the president’s proposals to dedicate more attention to evidence-based policy evaluation. Researchers at Urban Institute and elsewhere have already and will continue to rigorously evaluate the proposals to ensure that policymakers choose the best ones for the future health and growth of our economy and its people.

Photo by Adrienne Hapanowicz, Urban Institute

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