2014 Budget Proposal

Possibly intentionally late, the White House sent 2014’s $3.8 trillion budget proposal to Congress yesterday, some 65 days after the legal deadline. Let them feel the heat of the sequester and they’ll probably be more willing to accept a deal, the motive may have been.

Undoubtedly expecting a good deal of haggling over the many fine points, the proposal seems to have been drawn so precisely down the middle that both parties are finding fault with it. Here are just some of its highlights:

• We begin with the current 2013 fiscal year’s deficit of $973 billion—just as a starting point to keep the numbers within a relatable framework.
• The proposed 2014 budget would raise $1.8 trillion over 10 years (averaging $180 billion per year) by increasing taxes on the upper tiers of the wealthy, as well as downsizing some federal programs.
• $580 billion of increased revenue expected over 10 years (averaging $58 billion per year) by reducing tax breaks and deductions for the highest income earners.
• Proposed adoption of the “Buffett Rule”, a 30% minimum tax for combined household income of $1 million or more.
• Proposed $3 million limit on retirement accounts for private-equity executives and self-employed professionals.
• $130 billion saved over 10 years (averaging $13 billion per year) by adopting the “chained Consumer Price Index” to calculate Social Security payments and cost-of-living adjustments (upsetting Democrats), as long as these entitlement changes are accompanied by increased taxes (upsetting Republicans).
• $100 billion cut from defense and another $100 billion cut from domestic programs over 10 years (averaging $20 billion per year combined)—upsetting Republicans.
• $400 billion cut from Medicare and other health care programs over 10 years (averaging $40 billion per year)—upsetting Democrats.
• The administration projects the proposed 2014 budget will reduce the annual deficit to $744 billion, the lowest since 2008. It also projects the nation’s economy will have grown by 2.3% in 2013 and 3.2% in 2014.
• The combined effect of a shrinking deficit and an expanding economy is expected to lower the deficit’s impact on the annual economy. Where 2013’s deficit of $973 billion rubbed out about 6% of the total economy, the reduced 2014 deficit of $744 billion is projected to erase only 4.4% of next year’s expectedly larger economy.
• Adhered to over time, the administration projects this 2014 budget to shrink the annual deficit to just 2.8% of the economy by 2016, and even further to a mere 1.7% of 2023’s economy.

[That is, of course, unless one of the presidents between now and then decides to lead the nation into war again. Just to expand on that above-mentioned relative framework: the deficit for fiscal year 2002 was a mere $158 billion, while FY 1998-2001 all had surpluses. How everyone wishes for those numbers again.]

Sequester’s Replacement

Anyone can see this budget proposal is in for a rough initiation rite of passage. It will get slapped, jabbed, slashed, battered, and bruised by the time Congress gets finished with it. Republicans want lower taxes and lower spending, while Democrats want higher taxes and more stimulus.

By-and-large, though, the President can’t really be all that worried. The sequester’s $1.2 trillion in cuts straight across the board spread out over the next 9 years is already up and running.

Naturally, President Obama would like to see his budget proposal replace the sequester. But the urgency is now upon the shoulders of the parties. The longer they take to come to an agreement, the more both sides will give up what is dear to them at the hands of the sequester.

Potential Effects

For what it’s worth, the President is at least trying to spread the pain around evenly, asking both parties to give up something—increased taxes on one side and reduced Social Security on the other. As he explained:

“If we’re serious about deficit reduction, then these reforms have to go hand-in-hand with reforming our tax code, to make it more simple and more fair, so that the wealthiest individuals and biggest corporations cannot keep taking advantage of loopholes and deductions that most Americans don’t get,” quotes Bloomberg.

But it will be a tough sell, as both sides believe the budget’s proposals will hurt the economy; or to put it more accurately… will hurt each side’s interests.

On the Democratic side, Richard Trumka, president of the AFL-CIO union declared, as cited by Bloomberg, “This is bad policy that will slow economic recovery even further.” “America elected President Obama to protect us from bad Washington ideas like ‘chained’ CPI [part of social entitlement reforms], not to advocate for them.”

On the Republican side, House Speaker John Boehner voiced, “The president got his tax hikes in January.” “We don’t need to be raising taxes on the American people,” Bloomberg quotes.

Although American stock markets have been on a tear lately, rising to new all-time nominal highs and still chugging along at full steam, the battle over the nation’s budget will at some point begin to take its toll.

As Wealth Daily has been presenting over the past while, economists have already begun voicing their concern over the negative effect the sequester will have on the economy in no time at all, some already blaming it for March’s dismal job growth of just 88,000 new hirings.

Add to that the uncertainty over the passage of this new budget proposal—knowing how displeasing it is to both sides—and the stock market could be in for a rough ride over the next few months.

“It is unlikely that Congress will get down to serious budget negotiations until this summer, when the government once again will be confronted with the need to raise the government’s borrowing limit or face the prospect of a first-ever default on U.S. debt,” warns Fox News. “Early indications are that the budget negotiations will be intense.”

By extension, early indications are that market volatility over this period will likewise be intense. Record market highs, budget battles, a rapidly approaching debt ceiling… under all these pressures, something has got to give. Make sure it isn’t your portfolio. Keep reading Wealth Daily for the market insights you need to make informed investment decisions.

Joseph Cafariello

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