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Obama plan a victory for foes of austerity

U.S. President Barack Obama delivers his State of the Union speech on Capitol Hill in Washington, February 12, 2013.

JONATHAN ERNST/REUTERS

President Barack Obama's State of the Union address is a victory for the foes of austerity.

Mr. Obama articulated no desire to match Bill Clinton's achievement of a balanced budget

Instead, in his address late Tuesday, the president signaled a willingness to live with a certain amount of red ink. He called on Congress to work with him to narrow the budget deficit by an additional $1.5-trillion (U.S.) over the next decade.

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Combined with spending cuts and tax increases agreed to before the election and in the agreement to avoid the "fiscal cliff," that would entrench some $4-trillion in deficit-reduction measures. As the president noted, $4-trillion is the magic number that many economists say is necessary to "stabilize" U.S. finances.

Take note of that word - stabilize.

The $4-trillion target that Mr. Obama embraced Tuesday night is the amount necessary to stop U.S. debt from growing.

If Washington narrows the deficit by $4-trillion over the next decade, the debt would be in the vicinity of 70 per cent of the economy.

That's better than something around 100 per cent, which is the current trajectory. Still, a debt that is almost three-quarters of the size of gross domestic product will leave many uncomfortable. Paul Ryan, the Wisconsin Republican who leads the House budget committee, said Washington's goal should be to balance the budget immediately.

Austerity advocates such as Mr. Ryan will argue in the days and weeks ahead that stabilizing the growth of the debt is too limited a goal. In a decade, the costs of providing federal health and pension benefits will begin expanding dramatically - just as the debt is stabilized, it would begin growing again. That's why there is a strong case for doing more now.

But Mr. Obama has chosen to focus is energy on the present.

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Unemployment in the U.S. is acute, and the the gap between the rich and the poor is growing. Mr. Obama is keeping an eye on the country's finances.

But unlike, say, Canada in the 1990s, the president has no intention of making deficit reduction an all-consuming priority. Mr. Obama acknowledged that Medicare and Social Security costs are growing too rapidly, and said he wants to do something about it. But he's not proposing a massive overhaul, only "modest" reforms.

"Our government shouldn't make promises it cannot keep - but we must keep the promises we've already made," Mr. Obama said.

For the last several years, the champions of austerity have held the upper hand in the debate over what is necessary to get the world economy back on track after the financial crisis.

That might be shifting. Olivier Blanchard, the chief economist at the International Monetary Fund, now says the fund may have overestimated the economic gains that can be had from government spending constraint. Europe, where austerity has been the rule, is stuck in recession. And Republicans, who made the debt and spending their top issue, lost the election.

The extent to which the debate has shifted will be on display this weekend when finance ministers and central bankers from the Group of 20 meet in Moscow.

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Adam Posen, the head of the Peterson Institute for International Economics in Washington, said Tuesday on a conference call that he sensed the G20 was taking a step back from austerity, recognizing that pervasive unemployment demanded a renewed emphasis on government policies that spur economic growth.

On a separate conference call, a senior Canadian finance official, who briefed reporters on the G20 meeting on the condition of anonymity, conceded that the priority that was put on deficit reduction at the Toronto G20 summit in 2010 will be up for debate.

The Canadian official suggested Finance Minister Jim Flaherty still sees the need for fiscal discipline. Lael Brainard, the American representative at this weekend's G20 meeting, already is calling for an emphasis on growth-friendly measures. The Keynesians are back to fight another day.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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