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President Barack Obama - Source: Reuters -
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President Barack Obama projected the US budget deficit would
soar to a fresh record in 2010, challenging his push for fiscal
responsibility while driving to defeat double-digit
unemployment.
Dubbed an old-style liberal tax-and-spender by his Republican
opponents, Obama is under pressure to convince investors and big
creditors like China that he has a credible plan to control the
country's deficit and debt over time.
While maintaining policies this year aimed at protecting a
still-fragile economic recovery, in common with other major
industrial nations, Obama will save money by curbing 120 federal
projects, including a powerfully symbolic mission to return to the
moon, but invest more in education and research.
Initial market reaction was muted and analysts were surveying the
numbers with a healthy dose of scepticism.
"It is still tinkering around the edges. One has to look at more
meaningful things in terms of what will actually reduce the
deficit, (which is) the revenue picture," said Marc Ostwald, a
strategist at Monument Securities in London.
Polls show voters are worried by the weak condition of US finances,
and Obama plans to create a bipartisan fiscal commission to figure
out options on taxes and spending.
Obama's budget for the fiscal year to September 30, 2011, which is
subject to change by the US Congress, forecast a deficit of $US1.56
trillion in 2010, equal to 10.6% of the economy measured by gross
domestic product (GDP).
This rise was partly due to spending associated with a package of
emergency stimulus measures Obama signed last year.
The increase in the deficit compared with a $US1.41 trillion
shortfall in 2009 that amounted to 9.9% of GDP.
But this funding gap was forecast to dip to $US1.27 trillion in
2011, or 8.3% of GDP, and fall to roughly half that as a share of
the economy in the final year of Obama's term in 2012, meeting a
key pledge.
No cap-and-trade revenue seen
The budget incorporates healthcare legislation before
lawmakers.
But an administration official said $US646 billion in projected
revenue from a controversial cap-and-trade climate change bill had
been dropped from the budget, implying the White House is doubtful
the measures will pass Congress.
"To continue job creation and to continue economic growth over
time, it is important to bring those out-year deficits down," White
House budget chief Peter Orszag told reporters.
US economic growth jumped by 5.7% at an annual pace in the
fourth quarter, but this has yet to translate into greater hiring,
and unemployment of 10% is near a 26-year high.
Discontent over the jobless rate translated into political defeat
for Obama's Democrats in a recent election for the US Senate in
Massachusetts, foreshadowing significant losses for the party in
midterm congressional elections in November.
To boost jobs, Obama is setting aside $US100 billion in 2010 in tax
credits aimed at small businesses as well as investments in clean
energy and infrastructure, before starting to tighten the country's
fiscal belt the following year.
"We're trying to kind of accomplish a soft landing in terms of our
fiscal trajectory to avoid the risk of 1937 where we do excessive
deficit reduction too quickly," Orszag said ahead of the budget's
formal release.
Economists say a premature withdrawal of policies aimed at boosting
growth helped prolong the Great Depression in the 1930s and Obama
is determined to avoid repeating that mistake.
But he must also ensure that investors don't lose confidence in
the US ability to put its fiscal house in order.
Long-term cuts
As a result, the budget outlines measures to cut over $US1 trillion
from the deficit over the next decade, and almost twice this amount
once the declining cost of wars in Iraq and Afghanistan are taken
into account, Orszag said.
Obama previewed some of these steps in his State of the Union
address last week, including letting tax cuts lapse for affluent
Americans, a fee on big banks to recoup losses on a taxpayer
bailout during the 2008 financial crisis, and a three-year freeze
on domestic spending outside national security.
The White House says that allowing taxes to rise on families making
above $US250,000 a year will raise an estimated $US678 billion over
10 years; the bank fee is projected to recoup $US90 billion in that
time; while the domestic spending freeze will trim $US250 billion
from the deficit.
Obama expects to save $US20 billion in 2011 from the spending
clampdown by ending or paring back 120 programs, including the NASA
space agency's project to return to the moon.
However, these proposals will need congressional backing and
that may be difficult to secure.
Even if all of these measures are adopted, the deficit will remain
above the goal of three percent of GDP that Obama seeks, and he
plans to create a bipartisan fiscal commission to review spending
cuts and tax increases to achieve this target.
But Republicans are reluctant to serve on the panel from fear this
gives Obama cover to raise taxes, while some members of his own
Democratic party oppose cuts in spending.
The fiscal commission will be charged with balancing the budget
excluding interest payments on the debt by 2015, or curbing it to
three percent of GDP when these costs are included.
Obama's emphasis on fiscal restraint could appeal to politically
independent voters, who moved away from Democrats in the
Massachusetts race.
The president, whose own approval ratings have declined to about
50%, blames the surge in red ink on his predecessor, President
George Bush.
Obama argues the deficit was projected to top $US1 trillion when he
took office in January 2009 amid two wars and a recession that hit
government revenues and led to an increase in spending for programs
such as unemployment benefits.
