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President Obama's $3.8 Trillion Budget Aimed to Trim Future Deficits

Source: NY Times

Posted on 01 Feb 2010

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Today President Obama sent Congress a proposed budget of $3.8 trillion for the fiscal year 2011, saying that his plan would produce a decade-long reduction in the deficit from $1.6 trillion this year, a shortfall swollen by $100 billion in additional tax cuts and public works spending that he is seeking right away.

"We simply cannot continue to spend as if deficits don't have consequences, as if waste doesn't matter, as if the hard-earned tax money of the American people can be treated like monopoly money," Obama said at the White House.

But at the end of the decade, the yearly deficits would begin moving up again, as the projected costs of health and retirement programs for an aging population start to escalate, according to forecasts in the administration’s new blueprint.

No budget proposal is ever enacted wholesale by Congress, and the spreadsheet-boggling numbers in the White House plan are sure to produce anguished partisan and ideological debates over how best to address the deficit and the nation’s lingering economic problems between now and the start of the new fiscal year next Oct. 1 — if indeed Congress manages to complete its work by then, right before the midterm elections.

In brief remarks in the Grand Foyer at the White House, the president outlined the principles contained in his budget, saying: “Changing spending as usual depends on changing politics as usual.” He offered several examples of programs he believes should be eliminated and urged Congress to follow suit.

“I’m asking Republicans and Democrats alike to take a fresh look at programs they supported in the past to see what’s working and see what’s not and trim back accordingly,” Obama said. He said that his proposal to freeze many domestic programs for three years as a down payment involves “hard choices and painful tradeoffs not seen in Washington for many years.” Yet with the debt accumulated from the deficits of the past decade, he acknowledged, “our fiscal situation remains unacceptable.”

So he will ask a yet-to-be-named bipartisan commission to recommend by December a plan to balance the operating budget by fiscal year 2015, not counting the growing payments on the country’s amassed debt. Congressional leaders have committed to hold a vote on whatever plan such a commission produces.

Representative Paul D. Ryan of Wisconsin, the senior Republican on the House Budget Committee, called the budget “nothing more than a plan for more of the same — a very aggressive agenda of more government spending, more taxes, more deficits and more debt — with just a few cosmetic budget maneuvers to give the illusion of restraint.”

Mr. Ryan’s own blueprint for a balanced budget relies heavily on changes in the system of Medicare benefits for future recipients, the kind of proposal that would surely provoke an outcry among Democrats.

The president’s pivot from stimulus spending to deficit reduction in the budget for the coming fiscal year assumes that the economy will have fully recovered from the worst recession in eight decades.

But because the recovery remains fragile and unemployment high, Obama is first seeking the additional stimulus measures he has outlined in recent days, including a new tax credit for small businesses that hire new employees or raise the pay of existing workers. That sum is less than the $154 billion package the House approved in December, but more than the Senate has been planning for.

A $1.6 trillion deficit for this fiscal year, which ends Sept. 30, would be about $150 billion greater than the shortfall in 2009, which was the highest since World War II. It would equal almost 11 percent of the gross domestic product. Economists generally consider anything above 3 percent to be unsustainable over the long haul, although many say it is a necessary evil at a time of deep economic distress.

For 2011, Obama’s budget projects a slightly lower deficit of $1.3 trillion — about the level he inherited when he took office. That would be about 8.3 percent of gross domestic product, budget documents show.

Then, largely due to economic growth, the deficit would drop sharply for 2012, when Obama will be up for re-election, the budget shows. It would fall below $1 trillion for the first time in three years to an estimated $828 billion, or just over 5 percent of gross domestic product. But annual deficits through fiscal year 2020 would not drop below 3.6 percent of gross domestic product under the administration’s projections. That confirms that the downturn, which was more severe than the administration and many economists had anticipated, has dashed Obama’s promise to reduce the deficit to 3 percent of gross domestic product by the end of his term.

And by the end of the decade, projections show the annual deficit ticking upwards again, to 4.2 percent of G.D.P. in 2020, as growing health costs and an increasingly older population force up spending for Medicare and Medicaid benefits.

If a bipartisan commission were to produce, and Congress accept, a plan that would balance all spending by 2015 except for interest on the debt, that still would leave that year’s deficit at 3 percent of gross domestic product — reflecting the ballooning cost of financing growing government debt.

Beyond that near-term goal, Obama also will ask the commission recommend ways to reduce entitlement spending and raise revenues to put the country on stable fiscal footing for the long term.

Administration officials said they did not know when Obama would be ready to create and name a commission. It is not clear that Congressional Republican leaders will cooperate. They have opposed the idea, saying Democrats are responsible for the budget problem, though more than half the debt stems from policies enacted when Republicans controlled Congress and the White House.

The commission, as uncertain as it is, is a key part of Obama’s deficit reduction policy, which Mr. Orszag has described as a three-legged stool.

Another leg is renewed economic growth: The 10-year budget relies heavily on projections of higher tax collections from revived businesses and workers, and less spending for jobless benefits and other safety-net programs. (The White House forecasts economic growth of 3 percent next year and 4.25 percent in the following two years, with stubbornly high unemployment rates and continuing low inflation; that’s not far from the consensus of leading private forecasters.)

And the third leg is a mix of proposed spending cuts and tax increases that would save $1.2 trillion over the next decade, the administration estimates.

Most of that, $678 billion, would result from letting the Bush income tax cuts expire as scheduled after this year for households that have more than $250,000 a year in income. For everyone else, Obama will propose that Congress extend the tax cuts indefinitely.

A proposed tax on big banks to recoup any losses from the financial bailout program would collect $90 billion over a decade, and Mr. Obama would raise $40 billion by ending some tax breaks for oil, gas and coal companies.

Another $250 billion would be saved by freezing for three years the overall spending for domestic programs that make up about one-eighth of the federal budget, and by holding spending thereafter to the rate of inflation — a level of austerity that has no modern precedent in Washington.

Medicare, Medicaid and Social Security — the so-called entitlement programs that are the largest and fastest-growing part of the budget — would be exempted, along with defense and veterans programs.

The freeze would not affect the domestic programs across the board; Obama opposed such an approach in the presidential campaign when his Republican rival, Senator John McCain, proposed it. Instead, the budget would cut or eliminate more than 120 mostly minor programs while others — chiefly for education, research and energy programs—will get increases. The savings would be about $20 billion in fiscal year 2011.

For all the talk of fiscal restraint, the budget proposal hews closely to Obama’s long-standing policy goals, especially in areas like energy research and development, military contracting, education, transportation, homeland security and immigration control.

Among the winners, elementary and secondary education programs would receive $28 billion, a $3 billion increase, and the Pell grants for college would be increased $17 billion.

Civilian research and development programs would receive $61.6 billion, a $3.7 billion increase. States and cities would get more than $100 billion for infrastructure spending, and Obama is proposing a new $4 billion national infrastructure fund to help underwrite regional projects.

For war spending, Obama will seek an additional $33 billion for this year and $159 billion in 2011 for operations in Afghanistan and Pakistan.

The budget for the Department of Homeland Security would increase 2 percent to $43.6 billion, including $734 million to buy up to 1,000 advanced imaging machines for screening airline passengers as well as new equipment for detecting explosives in baggage. There would be more money to allow air marshals on more international flights.

While Obama’s budget for the coming fiscal year would total $3.8 trillion, just $1.4 trillion is domestic and defense spending that he and Congress directly control through annual appropriations. The rest is mostly automatic spending for the entitlement benefit programs and interest on a $12.4 trillion debt.

The administration said its proposed tax cuts for families and businesses would total about $300 billion over the decade. It would extend for a third year Obama’s “Making Work Pay” tax credit that is intended to offset payroll taxes for 110 million lower- and middle-income workers.

He also proposes to increase the child care tax credit, eliminate small businesses’ capital gains taxes on new investments and extend through this year a provision of last year’s economic stimulus law that allows small businesses to write off in the first year up to $250,000 in equipment investments.