When the President took office, the Nation was experiencing the worst financial and economic crisis since the Great Depression. This decline was not simply the result of a normal downturn in the business cycle; also contributing to it were irresponsible choices made by our public and private institutions that generated a meltdown in our credit and capital markets. As a result, the economy was in the midst of a severe collapse.

In the fourth quarter of 2008, real gross domestic product (GDP) was declining at a rate of 5.4 percent per year; household net worth fell by approximately $5 trillion or at a rate of 30 percent per year; consumer confidence had fallen to a 40-year low; and the country had lost 1.7 million jobs, which at that point was the largest quarterly decline since 1945. Many workers saw their retirement accounts dwindle in value, forcing some to delay retirement. As the housing market imploded, others found themselves overextended with mortgage payments they could no longer afford.

The economic downturn, combined with the previous Administration’s decisions not to offset in particular three large domestic initiatives (the tax cuts of 2001 and 2003 as well as the Medicare prescription drug benefit), meant that in January 2009, the President faced a deficit of $1.3 trillion, or 9.2 percent of GDP, along with a need to bolster macroeconomic demand to prevent the economy from slipping into a depression.

In addition, the Act has provided incentives to revitalize business investment and grants to State and local governments to relieve the strain on their budgets. In April and May, real per capita disposable personal income increased, mainly because of the tax reductions and one-time transfer payments included in the Act. Finally, ARRA provides funds for short-term and long-term investments that will lay a new foundation for long-term economic growth, creating new jobs and growing industries.

The Administration contemporaneously acted to address the financial crisis and get credit flowing again through the Financial Stability Plan, and worked to help homeowners facing foreclosure through the Homeowner Affordability and Stability Plan. In addition, the Administration took action to forestall the failure of two of the Nation’s largest automobile manufacturers and to strengthen the non-bank credit market. All together, these efforts—along with the ARRA—increased the deficit in the short run. In fact, 64 percent of the current deficit is directly attributable to rescue and recovery efforts and other countercyclical programs that were essential in preventing a deeper and more costly recession.

Despite the demands put on the treasury to respond aggressively to avoid economic collapse, the President in February put forward a Budget that re-oriented the Nation back to a path toward fiscal discipline. This began with an honest assessment of the country’s fiscal situation by accounting transparently for the cost of overseas military operations, natural disasters, expected increases in Medicare payments to physicians, and the real costs of preventing the alternative minimum tax from burdening middle-class taxpayers. The President’s Budget put the Nation on track to bring non-defense discretionary spending to its lowest level, as a share of GDP, since 1962.

Moreover, the Budget included a separate volume of program terminations and reductions, detailing 121 programs that do not work or are duplicative and should be eliminated or reduced.

Download U.S. Budget Mid-Session Review for Fiscal Year 2010

PDF format, 1.9MB, 74Pages.

Office of Management and Budget
www.budget.gov

THE LONG-TERM FISCAL CHALLENGE
The economic crisis and record budget deficits that the President inherited upon taking office will result in continued deficit spending. Although the deficit is projected to decline from current levels to about 4 percent of GDP by 2015 and remain at this level for the rest of the decade, this stability is only temporary, and the long-term deficit outlook remains daunting.

The Federal Government’s long-term fiscal shortfall is driven primarily by escalating health care costs. If health care costs continue to grow at their historical rates, Medicare and Medicaid will double as a share of spending on Federal programs within the next 30 years. These growth rates are simply unsustainable and are why slowing the growth in health care costs is the single most important step we can take to put the Nation on firm fiscal footing.

For example, slowing the rate of health care cost growth by 0.15 percentage points per year would produce the same amount of savings for the Federal budget as closing the 75-year Social Security shortfall.

This is why the President is committed to reforming the health insurance system this year. The Mid-Session Review identifies a total of $954 billion over 10 years to pay for health reform, about two-thirds from savings in Medicare and Medicaid and one-third from revenue measures. The Administration is committed to passing health insurance reform that is deficit neutral over the next 10 years and that is on a stable trajectory as the decade ends.

In addition to paying for health insurance reform, the Administration is committed to transformational steps that will move health care to a system that rewards the provision of better care, not more care; bend the health care cost curve; and substantially reduce long-term Federal deficits. That is why it put forward a proposal to establish an Independent Medicare Advisory Council, an independent, non-partisan body of doctors and other health experts with the authority to make recommendations about Medicare payment rates and other reforms.

Although health care is at the core of the country’s long-term fiscal problem, the fiscal situation will demand more action once the economic recovery is fully underway. That is why the President is committed to addressing the shortfall in the Social Security system and the other important factors affecting the long-term fiscal situation.

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