President Barack Obama vowed to cut $4 trillion in cumulative deficits within 12 years through a combination of spending cuts and tax increases, setting the stage for a fight with congressional Republicans over the nation’s priorities.
In presenting his long-term plan for closing the federal budget shortfall, Obama set a target of reducing the annual U.S. deficit to 2.5 percent of gross domestic product by 2015, compared with 10.9 percent of GDP projected for this year. He reiterated his support for overhauling the tax code to lower rates while closing loopholes and ending some breaks to increase revenue.
“We have to live within our means, reduce our deficit, and get back on a path that will allow us to pay down our debt,” Obama said in a speech today at George Washington University in the capital. “And we have to do it in a way that protects the recovery.”
Over the next five years, the administration forecasts the government will pile up a cumulative deficit of $3.8 trillion; over the decade, the cumulative deficits would rise to $7.2 trillion. With today’s proposal, Obama is going beyond the fiscal 2012 budget he presented on Feb. 14, which forecast cutting the deficit by $1.1 trillion over a decade.
As with his budget, Obama called for ending the Bush-era tax cuts for the wealthiest Americans, which are set to expire in 2012. “I refuse to renew them again,” he said.
Deadline for Plan
Obama said he was directing Vice President Joe Biden to start meeting next month with congressional leaders from both parties with the aim of producing by the end of June an agreement on a deficit reduction plan. The timing would coincide with a debate over raising the nation’s debt limit, which Republicans have tied to cutting government spending.
The Treasury Department estimated last week that the debt limit of $14.29 trillion will be reached May 16. Congressional action is required to raise the cap, though the Treasury said it can probably stave off default until early July.
To achieve his new goals, the president is urging Congress to pass a “debt failsafe” that would trigger across-the-board spending cuts and tax changes if the debt-to-GDP ratio hasn’t stabilized by 2014, according to an administration fact sheet. The automatic cuts wouldn’t apply to entitlements, including Social Security, Medicare, and programs intended for low-income Americans.
Obama would target government spending, from the Pentagon to the Department of Agriculture. He proposes saving $400 billion in current and future defense spending and called for a “fundamental review” of U.S. military missions.
Treasuries and the dollar rose, while the Standard & Poor’s 500 Index halted its longest slump since November. Ten-year Treasury note yields slipped three basis points to 3.46 percent at 4:07 p.m. in New York. The Dollar Index, which gauges the currency against six major counterparts, climbed 0.2 percent and the S&P 500 rose 0.1 percent to 1,315.41 at 2:56 p.m. in New York.
For all the concern about the deficit in Washington, in the bond market yields in the U.S. are lower now than when the government was running a budget surplus a decade ago even though Treasury Department data show that the amount of marketable debt outstanding has risen to $9.13 trillion from $4.34 trillion in mid-2007. The yield on the benchmark 10-year note is below the average of 7 percent since 1980 and compared with the average of 5.48 percent in the 1998 through 2001 period, according to Bloomberg Bond Trader prices.
Signaling the political fight his plan faces, Republican congressional leaders said after getting briefed by the president that they won’t accept tax increases as part of a deficit-cutting plan.
The president “heard us loud and clear” on the tax issue, House Speaker John Boehner of Ohio told reporters after the White House meeting. “If we are going to resolve our differences and do something meaningful, raising taxes will not be part of that.”
Most of the reductions proposed by Obama will be phased in to the second half of the 12-year timeframe, to avoid stifling the economic recovery, according to the White House.
The president borrowed some ideas from the Simpson-Bowles debt commission he created last year, drawing on the co- chairmen’s recommendation for a simpler, fairer tax code that lowers rates and increases revenue. He also adopted the recommendations on non-security discretionary spending, saving $770 billion by 2023.
Analysts said Obama’s proposal for a “failsafe” trigger was a positive move.
Stan Collender, managing director of Qorvis Communications and a former congressional budget aide, said the president’s approach attempts to overcome the limits of 1985 Gramm-Rudman- Hollings Act, which required automatic budget cuts if deficit targets weren’t reached.
Because those targets were based on budget projections, White House officials could avoid them by plugging in more- positive economic assumptions to make deficits seem smaller, he said.
A debt target is harder to fudge, he said, and that sends a positive message to the bond market.
“We had triggers in the past, but no one decided to comply with them,” Collender said. A debt trigger “is going to be monitored by people in the markets who are very serious about it and who aren’t in the political system.”
‘Teeth’ in Process
Peter Orszag, Obama’s first budget director and now vice chairman of Citigroup Inc.’s investment-banking division, said the trigger mechanism “needs to be better defined but offers the hope of providing some teeth to the process.”
The administration is aiming to provide a counterpoint to the budget plan released last week by Representative Paul Ryan, which relies on deep cuts in federal spending to trim the deficit. Obama rejected the Wisconsin Republican’s idea of a voucher-like system for future Medicare recipients.
While calling for Republicans and Democrats to come together and saying said both sides share the “worthy goal” of cutting debt, Obama said the Republican plan “would lead to a fundamentally different America than the one we’ve known, certainly in my lifetime.”
He also was critical of the policies pursued under his predecessor, former President George W. Bush. Without naming Bush, Obama said that after the government brought down the deficit and turned to a budget surplus by the end of the 1990s, “we lost our way in the decade that followed.”
“We increased spending dramatically for two wars and an expensive prescription-drug program, but we didn’t pay for any of this new spending,” he said. “Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts -- tax cuts that went to every millionaire and billionaire in the country.”
A broad group of Senate Republicans and Democrats has been pressing Obama to endorse a goal of cutting the deficit by at least $4 trillion, in line with the plans by the debt panel and Ryan.
The recommendations from the debt commission’s co-chairmen, former Senator Alan Simpson, a Republican from Wyoming, and former Clinton administration official Erskine Bowles, a Democrat, both of whom were at the speech, would cut almost $4 trillion over the period. Both used a combination of spending cuts and higher revenue.
Ryan’s plan would cut the deficit by $4.4 trillion over 10 years, primarily through reductions in federal spending. He proposes to reduce top income and corporate tax rates from 35 percent to 25 percent.
Obama lashed out at the Republican proposal.
“There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires,” he said. “And I don’t think there’s anything courageous about asking for sacrifice from those who can least afford it and don’t have any clout on Capitol Hill.”
Ryan, chairman of the House Budget Committee, said at a news conference following the president’s speech that he was “very disappointed” in what he heard, and that the president’s proposals were “hopelessly inadequate to address our country’s pressing fiscal” challenges.
“What we heard was a partisan broadside from our campaigner in chief,” Ryan told reporters.
Earlier, Ryan had said his party could work with Democrats to hammer out a plan to shore up Social Security in time for a vote on the debt limit.
“We disagree on the area of health-care reform,” he said in an interview. “But on Social Security, from just listening to the various Democrats and Republicans around here, we’re not worlds apart.”