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Obama’s $3.7 Trillion Budget Sets Fight in Congress

U.S. President Barack Obama
President Barack Obama has promised to freeze non-defense discretionary spending for the next five years. Photographer: Andrew Harrer/Bloomberg

Feb. 14 (Bloomberg) -- President Barack Obama will send Congress a $3.7 trillion budget that would reduce deficits by $1.1 trillion over a decade, setting up a battle with Republicans who have already deemed the plan insufficient to reduce federal debt.

The deficit for the current fiscal year is forecast to hit a record $1.6 trillion -- 10.9 percent of gross domestic product -- up from $1.4 trillion the administration estimated previously, according to documents released this morning by the administration. It would fall to $1.1 trillion in fiscal 2012, the fourth consecutive year of deficits exceeding $1 trillion. By 2015 it would decline to $607 billion, or 3.2 percent of GDP.

About two-thirds of the deficit reduction comes from spending cuts in areas ranging from heating subsidies for the poor to grants for airports and water-treatment plants. The rest is from revenue increases, including letting taxes rise for married couples with more than $250,000 in annual income, according to the documents.

White House budget director Jacob Lew defended the spending blueprint against criticism that it fails to recommend any major steps to reduce the costs of Social Security, Medicare or Medicaid.

“I know that would make a lot of people happy for there to be a big, bold proposal,” Lew said in a Bloomberg Television interview. “My experience over the last 30 years is that when you put a proposal out there, before you’ve laid the foundation for a bipartisan discussion, it actually doesn’t move the process forward,” and instead sets it back.

Republican Resistance

The president’s full spending blueprint is set for release at 10:30 a.m. Washington time and it will hit immediate resistance in Congress. The Republican majority in the House is trying to eliminate more than 100 programs for a savings of $61 billion this year and has vowed to oppose tax increases. Congress still hasn’t enacted Obama’s fiscal 2011 spending plan, submitted last February, and the government is operating under a temporary spending authority that expires March 4.

“It looks to me that it is going to be very small on spending discipline and a lot of new spending -- so-called investments,” House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, said on “Fox News Sunday” yesterday. “The country’s biggest challenge, domestically speaking, no doubt about it, is a debt crisis” and the president’s plan “shows that he is abdicating leadership on that point.”

Fiscal Commission

The budget falls short of the deficit reduction that Obama’s fiscal commission proposed in December and would have only a modest impact on the $12 trillion in total deficits the Congressional Budget Office projects the government will run up over the next 10 years. That’s primarily because Obama isn’t proposing changes for Medicare, Medicaid or Social Security, the entitlement programs that represent about 40 percent of the budget and are primary drivers of long-term deficits.

The administration anticipates the deficit will be $627 billion in 2017, or 3 percent of the nation’s gross domestic product, and grow in subsequent years reflecting the impact of Baby Boomers qualifying for Social Security and Medicare.

By 2021, the deficit would grow to $774 billion, according to White House estimates. By comparison the fiscal commission called for $4 trillion in cuts in order to squeeze the deficit down to $279 billion in 2020. That included reducing benefits in the entitlement programs.

Deficit Comparisons

The deficit as a proportion of GDP is the highest since the 21.5 percent in 1945 at the end of World War II. The International Monetary Fund, in a global report released in October of last year, said it projected the German deficit would be 3.7 percent of GDP in 2011, while comparative figures were 8.9 percent for Japan, 8.1 percent for the U.K. and 2.9 percent for Canada.

Scores of programs would be slashed under the administration’s budget to make room for increases elsewhere while still staying within Obama’s promise to freeze non-defense discretionary spending for the next five years. About half of all federal departments and agencies would see their budget reduced from levels in 2010, the last time agencies had an enacted budget, according to the administration documents.

The poor would receive less help paying their heating bills, and graduate students would pay more for their student loans. The budget also cuts $1 billion for airport grants and $950 million in water-treatment plants and other infrastructure.

Corporate Taxes

Obama repeated a request to Congress to overhaul the corporate tax code to reduce rates, make it simpler and abolish “special-interest loopholes.” The budget doesn’t offer a specific plan. Lew has said such a package may be negotiated later with Congress, if there’s enough support.

Obama is calling for the elimination of a dozen tax breaks for oil, gas and coal companies to raise $46 billion over 10 years. These funds would be diverted to help pay for putting 1 million electric vehicles on the road by 2015, doubling the share of electricity from clean energy by 2035 and increasing the efficiency of energy use in buildings by 20 percent.

The administration wants to spend $53 billion over the next six years on high-speed rail, and proposes spending $15.7 billion to build a nationwide wireless network for emergency workers and to widen access to mobile high-speed Internet. Obama also included his plan for a National Infrastructure Bank, seeding it with $50 billion intended to lure private investment for specific projects.

“The challenge we have is live within our means but also invest in the future,” Lew said on the CNN program.

Spending Levels

House Speaker John Boehner, an Ohio Republican, dismissed Obama’s spending freeze, saying it would come only after Democrats approved sizable spending increases over the past two years. “Locking in that level of spending is way too much,” he said on NBC’s “Meet the Press.”

Boehner and Ryan argued that cutting the deficit and spending are more important to economic growth than the increases in education, research and infrastructure spending that Obama wants.

Getting the deficit under control “will help the economy now because that sends the signals to the markets, to the small-businesses men and women of America, that my taxes aren’t going to have to pay for all this borrowing,” Ryan said.

The U.S. GDP rose at a 3.2 percent annual pace in the fourth quarter of 2010, falling short of the 3.5 percent median forecast of 85 economists surveyed by Bloomberg News.

While the U.S. unemployment rate has remained at least 9 percent for the longest stretch since monthly data was first compiled in 1948, U.S. corporations by the end of last year’s third quarter saw profits rebound to a near record. Nonfinancial companies held $1.9 trillion in cash on their balance sheets, government data show.

To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net; Brian Faler in Washington at bfaler@bloomberg.net;

To contact the editor responsible for this story: Robin Meszoly at rmeszoly@bloomberg.net

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