Most every year about this time, I criticize the sitting President of the United States for submitting an ever-larger federal budget that almost always includes a big deficit which adds to our massive national debt. I have criticized every president for this going all the way back to Ronald Reagan who also ran budget deficits, especially in his second term. Yes, I even criticized “The Gipper” who sparked my initial interest in politics way back in 1976. 

Given my long history of speaking out on this issue, I see no reason to make an exception today., President Barack Obama submitted the largest proposed federal budget in history to Congress. In the past, most presidents who were shellacked in the mid-term elections tended to compromise in order to work with the opposition in Congress. Not this president!

The president’s proposed federal budget for fiscal year 2016 is a whopping $3.99 trillion which would increase spending for government agencies by a whopping 7% and includes numerous onerous tax increases to pay for most of it. Yet even with the tax increases, the FY2016 deficit is projected to be $474 billion.

The reality is that this is all simply political theatre. The president knows he won’t get nearly all of the new spending increases and taxes on the wealthy and corporations he proposes, what with a Republican-controlled Congress. But he does throw a very large bone to his liberal political base, while making the Republicans look like the “Party of No.”  

In any event, I’ll briefly summarize the president’s latest record-large budget proposal and you can make of it what you will. But before we go there, let’s take a look at last week’s disappointing fourth quarter GDP report and what transpired at the Fed’s first policy meeting of 2015. 

Gross Domestic Product Disappoints

For all of 2014, GDP expanded 2.4% – only slightly better than the average 2.2% annual growth of 2010-2013. By comparison, GDP growth averaged 3.4% a year during the 1990s.

Many forecasters expect similar growth of only 2%-3% in the current quarter as turbulence in Europe and Asia, coupled with the stronger US dollar, threaten to hit manufacturers and weaken exports.

The good news is that a more recent GDP reported the fact that consumer spending grew at an annualized rate of 4.3% in the fourth quarter, the highest pace since early 2006.  Thanks to the cheapest gasoline in years and the biggest employment increase since 1999, households are gaining the confidence to spend more freely.

Unfortunately, the other major components of output flashed new signs of weakness in the latest report. Business investment – reflecting spending on equipment, software and intellectual-property – grew at a paltry 1.9% rate. And government spending declined at a 2.2% pace, reflecting a sharp drop in defense outlays.

Despite the economy’s expansion, inflation has been heading down, due largely to a sharp drop in oil prices since the summer. The price index for personal consumption expenditures (PCE) – the Fed’s preferred measure for inflation – fell at a 0.5% annual rate in the fourth quarter, compared with the 1.2% annualized increase in the third quarter. The decline in PCE in the fourth quarter complicates matters for the Fed, as I will discuss below.

All in all, the latest advance estimate of fourth quarter GDP was definitely a disappointment. 

Fed’s First Policy Meeting of 2015 – What to Do?

The committee’s first official policy statement had few surprises but it is clear that the Fed wants to start to normalize interest rates as soon as possible. However, it may be later rather than sooner given that inflation continues to fall, both here and in Europe and elsewhere. Here are the highlights from the policy statement.

First, the statement cited continuing improvement in the jobs market. “Labor market conditions have improved further, with strong job gains and a lower unemployment rate.   On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.” That’s Fed-speak for the economy is getting better.

Next, the statement included a fairly sizable section of text warning about low inflation. Specifically, the statement said that “Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Without saying so specifically, the Committee is clearly worried about the growing risk of deflation.

Third, the statement continued to include the word “patient” as it pertains to when the Committee might move to raise the Fed Funds rate from near zero where it has been since 2008. Based on comments from Fed Chair Janet Yellen last year, most analysts expected the Fed to raise the rate around the middle of this year. However, with inflation so much lower than the Committee wants, the thinking now is that a rate hike won’t come until this fall most likely. [AOA:  Might even be next year.] 

Obama’s $4 Trillion Budget & Big Tax Increases

Here’s a summary of President Obama’s latest record-large federal budget proposal for FY2016 that he recently unveiled. The president proposed a nearly $4 trillion budget package on Monday, which he claims is aimed at improving the nation’s infrastructure and boosting middle-class Americans. But it comes with a cost of tax increases on businesses and the wealthy as well as an end to existing spending caps (sequestration).

The budget, much of which Mr. Obama detailed, makes a case for easing Washington’s emphasis on deficit-reduction measures, given the strengthening economy. It makes no new effort to fix the swelling costs of Social Security and Medicare.

The proposed budget calls for $3.99 trillion in spending and $3.53 trillion in revenue, while running a $474 billion deficit in the fiscal year beginning October 1 – even though Obama claims his new spending plans are “fully paid for.” Obama’s budget plan never reaches balance over the next decade and projects the annual deficit would rise to $687 billion in 2025.

The 2,000-page plan calls for an end to the automatic, across-the-board spending cuts that both parties agreed to four years ago, dismissing them as “mindless austerity” brought about through manufactured crises.” Lawmakers reached a bipartisan deal to ease some of the cuts two years ago, but that deal expires in October.

Little in the White House budget is expected to advance in the GOP-controlled Congress; however, many Republicans want to increase spending for the military and infrastructure, so there is some hope for some modest deals later this year. But I wouldn’t hold your breath.

Lawmakers and Mr. Obama have also expressed hope of reaching an agreement on an overhaul of the tax code, but have shown few signs of being able to forge the politically difficult compromises required. Don’t hold your breath on that one either. 

Tax Increases to Fund Obama’s Spending Bonanza

As stated in his State of the Union speech, President Obama wants to increase income, capital gains and dividends taxes by a whopping $1.44 trillion over the next 10 years in order to finance tax cuts for low and middle-income earners and other spending projects.

In order to pay for these tax cuts and increased spending, Obama would raise taxes on the wealthy, corporations and large financial institutions. These tax increases include a big boost in the capital gains and dividends rate to 28% for top income earners, as well as a new capital-gains tax on many inheritances. Those two changes would supposedly generate about $208 billion over the next decade.

Finally, the president also proposed a broad new tax on financial firms with more than $50 billion in assets, a proposal that is unlikely to advance in Congress but underscores Wall Street’s continued status as a political punching bag.

The White House said the new tax would discourage excessive leverage, or borrowing, by taxing the liabilities of about 100 big financial firms, including banks, asset managers, broker-dealers and other companies. It would raise an estimated $112 billion over 10 years to fund other priorities, such as tax breaks for middle-income workers.

The question is: Is any of this legal? The answer is: Not unless Congress approves it, which is highly unlikely. In a message to Congress that accompanied the budget release, Mr. Obama said his proposals were “practical, not partisan.”

The White House Office of Management & Budget admits that Obama’s new budget – even with all the proposed new taxes would add approximately $6 trillion to the national debt by 2025, pushing it above $24 trillion.

Many Republicans quickly dismissed Obama’s budget request and have started drafting their own blueprint that would seek to eliminate deficits entirely over the next 10 years and tackle the biggest drivers of government spending – Social Security and federal health programs. We’ll have to see how that goes. In any event, a big budget battle is looming. 

Gary D. Halbert is the president and chairman of Halbert Wealth Management, Inc. His Forecasts & Trends Weekly E-Letter may be obtained free of charge by subscribing at www.halbertwealth.com