Obama’s highly politicised budget

In what can only be described as a highly politicised budget, President Obama has sent Congress a document which lifts taxes significantly for the rich while at the same time raises government spending. Should this budget be enacted (chances are zero), then the well-off will suffer the most financial pain, including the expiration of Bush-era tax cuts for those earning more than USD 250K a year, a minimum tax for those earning more than USD 1m per year and huge increases in tax on dividends for the wealthy (from the current 15% to 39.6%).

Unfortunately, once again, there is absolutely no attempt to address America’s bulging fiscal obesity. The deficit this year is forecast to reach USD 1.33trln, representing some 8.5% of GDP. It will be the fourth straight year that the deficit is above one trillion dollars. Public debt is forecast to climb to USD 18.7trln by 2021, or 77% of GDP.

Unsurprisingly, Obama’s budget has been slated by fiscal conservatives who at the same time recognise that these measures are very unlikely to ever see the light of day. Firstly, they will never be passed before the November 6th Presidential election. And in any event, there are other pressing fiscal questions such as what happens to the automatic spending cuts worth USD 1.2trln that were already supposed to be enacted, or the issue of raising the debt ceiling which caused such an incredible fracas last summer.

In sharp contrast to many European countries, America remains in fiscal denial, much to the chagrin of international investors. However, America continues to get away with it, in part because it is still the world’s major fiat currency.