A Budget We Can Believe In

To:            President Barack Obama

From:       Robert Bixby, William Galston, Ron Haskins, Julia Isaacs, Maya MacGuineas, Will Marshall, Pietro Nivola, Rudolph Penner, Robert Reischauer, Alice Rivlin,  Isabel Sawhill, Eugene Steuerle

Subject:   A Budget We Can Believe In

Date:        January 27, 2009

Your first budget will be a defining document. It will cast the basic mold of your administration, highlight your key priorities, and specify how you are going to deliver on your most important campaign promises or modify them in light of new developments. The decisions you make in shaping this budget will be among the most consequential of your tenure.

In our view, the overriding imperative for your first budget is to strike a judicious balance between America's short-term and long-term economic needs. To accomplish this, that budget must be strategic as well as tactical. The steps you take to address our short-term problems must not make it harder to achieve our long-term goals. Indeed, they should set the stage both for steady economic growth and a sustainable fiscal future. To be a truly transformative president, you must not allow the urgency of the short-term to crowd out concern for the country's long-term wellbeing.

As you have noted, the key short-term challenges are:

• stabilizing America's financial markets to ensure an ample and affordable supply of credit, which is the lifeblood of our economy; and
• reducing the severity and duration of the current recession and getting Americans back to work.

• controlling the growth of health costs and putting Social Security on a financially sustainable path.
• reforming America's tax system to make it more efficient, fairer and simpler and to raise adequate revenue while maintaining economic growth.

These short- and long-term economic imperatives are inextricably linked. The costs of stabilizing the financial markets and stimulating economic growth will generate a large increase in our national debt. We will have to borrow money in domestic and international capital markets to finance this debt, and without a serious commitment to long-term fiscal restraint, lenders will eventually question the nation's fiscal credibility. They may respond by reducing the share of their portfolios devoted to U.S. governmentdebt or by charging higher interest rates. In the extreme, the reluctance to buy U. S. debt could cause a crisis in international capital markets. No one can describe the risks precisely, but Wall Street’s recent troubles demonstrate that the perils of over reliance on debt can come swiftly and in unpredictable ways. What is predictable is that if the long-term problem is not confronted, interest costs will absorb a growing proportion of our budgetary resources and, together with growing health costs and Social Security, will threaten to crowd out spending on programs for the poor, children, and improving the nation’s infrastructure. Moreover, our dependence on foreign creditors and the resulting mortgage on future national incomes will diminish American standards of living for generations to come.

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