Fiscal Cliff Adds Urgency to US Election Budget Showdown

With a record tax increase on tap for January 1, 2013, there has never been a better time for Washington to have a serious debate about fiscal policy. Before the economy reaches the so-called fiscal cliff, when huge tax increases and spending cuts are scheduled to take effect, US voters will have the opportunity to make a clear choice between two fiscal visions in the November elections.

Republican presidential nominee Mitt Romney’s choice of Congressman Paul Ryan as his running mate is helping him articulate a distinctive fiscal position. In April, Ryan proposed a long-term federal budget that contrasted sharply with President Barack Obama’s budget proposal. According to analyses by the Congressional Budget Office (CBO) in March and April, aggregate spending in the President’s budget would reach 22.8% of gross domestic product (GDP) in 10 years, compared with 20.4% in Ryan’s plan.

On the surface, that’s not such a big gap. Beneath the surface, there’s a huge difference in spending priorities.

For example, the President’s budget makes no fundamental changes to entitlements programs, so growth in spending on a host of mandatory programs (Medicare, Medicaid and Social Security) would continue unabated. According to the CBO, mandatory spending, which currently equals 13.7% of GDP (and 63% of noninterest government spending) would reach 14.6% of GDP in 2022 (nearly 75% of noninterest government spending) under Obama’s budget.

Ryan’s budget recommends major changes to Medicare and Medicaid spending and aims to eliminate subsidies to be provided through new insurance exchanges under the Affordable Care Act. According to the CBO, the Ryan plan would bring the mandatory spending share of the budget back to its historical average of 11% by 2022.

CBO reports have highlighted shortcomings of both proposals. For example, the CBO said the President’s budget proposal “would reduce output because deficits would exceed those under current law.” At the same time, the CBO said the Ryan budget lacked specifics on the underlying tax policies to support the projected path of revenues over the next decade.

I think that there probably hasn’t been such a wide gap between the federal budget platforms of a sitting president and a candidate since the 1980 elections, when Republican presidential nominee Ronald Reagan committed to a major, long-term defense buildup and tax cuts, in contrast with President Jimmy Carter’s policies of staying with the status quo.

Today, the stark differences in fiscal platforms set the stage for an exciting election—but don’t envy the winner. Even with a clear mandate from the public on fiscal policy, whoever becomes the next US president will need to figure out how to craft a budget that will balance the government’s books, meet the needs of its citizens and stop draining resources from the private economy, in order to help promote economic growth.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Joseph G. Carson is US Economist and Head of Global Economic Research at AllianceBernstein. 

Joseph G. Carson

Joseph G. Carson joined AB in 2001. He oversees the Gobal Economic Research group, which provides economic analysis for the firm, and has primary responsibility for economic and interest-rate analysis of the US. Previously, he was chief economist of the Americas for UBS Warburg . Over the years, he has also served as the chief US economist at Deutsche Bank, as chief economist at Chemical Bank and Dean Witter, and as senior economist at Merrill Lynch. Carson began his professional career in 1977 as a staff economist in the US Department of Commerce and represented the department at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. Early in his career, he also held a variety of roles at General Motors. Carson was named to the Institutional Investor All-Star Team for Fixed Income while at Deutsche Bank, He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Location: New York

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