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How Obama’s new budget fits into the UK debate

14 February 2012

3:08 PM

14 February 2012

3:08 PM

Yesterday, Barack Obama set out his budget for ‘Fiscal Year 2013’ – that is, for the year beginning October 2012 (in the US, the fiscal year runs from October to September, rather than April to March as it does here). Of course, the federal budget has to be passed by both houses of Congress before being signed off by the President, so the final version will look very different to this one. It is better
thought of as a statement of Obama’s intent, and his starting point for the negotiations between Congress and the White House. Nevertheless, it throws up a few interesting points, not least in how it relates to our own economic debates in the UK:

1. Deficit reduction. Last year, we said that Obama’s 2012 budget cut the deficit ‘faster, but not further, than Osborne’s’. And that’s still pretty much the case now: Obama plans to slash the deficit to below 4 per cent of GDP by 2014, but then keep it roughly flat. Osborne will take longer to get borrowing down to 4 per cent, but plans to go further towards zero afterwards:


2. Spending cuts. We’ve said before that Obama’s plans were to cut total spending by more in one year (2012) than Osborne planned to in four. That’s no longer the case: whereas his last budget showed a real terms cut of 3.9 per cent from 2011 to 2012, this one shows an increase of 2.8 per cent. So has Obama changed course and gone for extra spending, a sort of Plan B like the one Labour want George Osborne to adopt? Not at all. Actually, his spending total for 2012 is unchanged from last year’s budget. What makes the difference is that the figure for 2011 is much lower, so this actually shows extra spending restraint. And Obama’s new plan includes a 1.7 per cent cut in 2013, compared to Osborne’s 1.0 per cent.

3. Debt. The US and UK debt profiles for the next few years now look very similar: both peaking at around 78 per cent of GDP in around 2014/15:

4. Obama the Lib Dem. It’s striking how similar Obama’s tax priorities are to those of the Liberal Democrats, even though the specifics differ either side of the
Atlantic. Obama wants to extend the payroll tax cut for ‘160 million hardworking Americans’, which he says is worth ‘about $40 in every paycheck’ for ‘the typical family earning $50,000 a year’. The Lib Dems have been pushing to raise the income tax personal allowance to £10,000 ‘saving working people £700 a year’. Obama wants to close loopholes and reduce tax deductions for high earners, as well as increasing the capital gains tax rate from 15 per cent to 20. The Lib Dems have already succeeded in raising capital gains tax from 18 per cent to 28, and Danny Alexander is now calling for a lower rate of tax relief on pension contributions for high earners. As I say, the similarities are striking.

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