The budget that President Obama will send to Congress on February 1 must address two seemingly conflicting goals: he must propose additional short-term spending in order to help the nation’s economy recover so that we can reduce the long-term national debt. Spend more now to reduce debt later? Yes, and here’s why.

With the nation’s unemployment rate above 10 percent, with a record number of home foreclosures and business bankruptcies, and with more Americans falling on hard times, it is clear that the path to economic recovery will be long and difficult. The federal government must continue to take temporary and targeted steps to boost the economic recovery, such as extending unemployment benefits, food stamps, and improvements in the Child Tax Credit and the Earned Income Tax Credit. These actions have the biggest bang for the buck because they put money into the hands of struggling individuals and families who will spend those dollars in their local communities.

Congress should also extend the Recovery Act’s provisions that increase the federal share of funding for Medicaid and state fiscal stabilization funds, which primarily support education. The $2.6 billion in federal Medicaid and stabilization funds that Minnesota received in 2009 was significant in a difficult year, and prevented many Minnesotans from losing health care and avoided deeper cuts in education. But Congress must act promptly, because current stimulus funds will run out by the end of 2010 while the states will still face deep budget shortfalls. Extending the federal contribution for Medicaid will help Minnesota and other states avoid making even deeper budget cuts that will hurt vulnerable Minnesotans, cost jobs and put a damper on the economic recovery.

Strengthening the economy through temporary and targeted spending will put us in a stronger position to reduce annual deficits and our long-term debt. Let’s be clear: stimulus spending is not the primary contributor to our budget deficit. The Center on Budget and Policy Priorities issued a paper in December that found the biggest contributing factors to the increase in large federal deficits were the tax cuts enacted under President George W. Bush, the wars in Iraq and Afghanistan and the economic downtown that has led to an unprecedented drop in tax revenues.

Combining short-term spending to revitalize our economy with tax policies that increase revenue will strengthen our fiscal position and help reduce deficits. The President’s budget calls for allowing the temporary 2001 and 2003 tax cuts aimed at the top income categories to expire.  Congress should also heed the President’s call to restore the federal estate tax and to make permanent the 2009 parameters of the law, which would still provide a dramatic tax cut compared to 2001 levels and only 0.2 percent of estates would have any estate tax liability, according to the Tax Policy Center.

By temporarily targeting spending now to pave the way for economic recovery, and enacting fair and sensible tax policies, we will be in a better position to reduce our national debt in the long term.

-Steve Francisco

Filed under: Federal Budget