Obama’s Budget: Small Cuts, Big $1.6 trillion Deficit
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The Fiscal Times
February 14, 2011

President Obama on Monday sent Congress a fiscal 2012 budget calling for $3.73 trillion of spending and predicting a record $1.6 trillion deficit for the current fiscal year. The plan represents a modest, cautious strategy for controlling the long-term debt.

The new deficit forecast for the current fiscal year that ends Sept. 30 is larger than the $1.48 trillion deficit recently projected by the non-partisan Congressional Budget Office, and it further underscores the challenges confronting the Obama administration and a politically divided Congress in containing the long term debt. The White House and the Republican controlled House appear headed for a major confrontation over GOP efforts to cut as much as $100 billion from this year’s budget, and over conservative resistance to raising the $14.3 trillion total ceiling on government borrowing  to avert a possible government shutdown and financial crisis this spring.

As promised in his State of the Union address, the president’s budget for the fiscal year that begins Oct. 1st  includes a five-year freeze on all discretionary spending outside of defense and national security, and a slowing of growth in the Pentagon budget projected to save $78 billion over the next five years.  The budget also outlines proposed cuts in a wide range of popular domestic programs – including low-income energy assistance, community development block grant and Great Lakes cleanup projects – and increases in tax revenues in a bid to trim deficit spending by a total of $1.1 trillion over the coming decade.

Pell grants for low-income college students would be eliminated for summer classes, and graduate students would begin accruing interest immediately upon receiving federal loans, rather than after graduation. These savings would largely offset the rapid increase in student demand for these Pell grant loans.

About two thirds of these overall savings would come from spending cuts and a third from new tax revenues generated in part by eliminating deductions and rescinding tax breaks for high income families making more than $250,000 a year. The budget calls for more than $1.6 trillion in fresh revenue over the next decade, much of it through higher taxes on the wealthy and businesses.

The overall spending of $3.7 trillion called for in Obama’s budget is about a $90 billion less than the estimated  spending for the current 2011 fiscal year, or a two-percent reduction.

The president’s budget relies on a fairly optimistic outlook for the economy over the next few years, which if it doesn’t pan out would sharply eat into projected tax collections. The administration expects the economy to grow at a 2.7 percent clip this year, the same as the Congressional Budget Office. But it expects the next decade will average 3.4 percent growth, which is slightly faster than the CBO projection of 3.1 percent average annual growth–but in the middle of private forecasts, according to Austan Goolsbee, the president’s chief economic adviser.

But contrary to the call of Obama’s fiscal commission last December to reduce the deficit by $4 trillion by 2020 through deep spending cuts, elimination of scores of tax loopholes and major entitlement reform, Obama balanced his concern about  fiscal discipline with a fresh round of spending on education and research, investments in infrastructure and high-speed wireless data network, and other programs he says are essential to the economic recovery and enhancing the country’s global competitive edge.

“So even as recovery begins to take hold, we have more work to do to live up to our promise by repairing the damage this brutal recession has inflected on our people, generating millions of new jobs, and seizing the economic opportunities of this competitive, new century,” Obama said in his budget message to Congress.

The overall budget plan would reduce the federal deficit as a share of gross domestic product to 3.1 percent by 2015 – slightly higher than the 2.4 percent goal set by the president’s fiscal commission in its report released last fall.

During a speech this morning at the Parkville Middle School and Center of Technology in Baltimore, Obama characterized his proposed spending cuts as simply a “down payment” on reducing the long term debt, but without taking dire action that could derail the recovery from the worst recessions in modern times. “We can’t sacrifice our future in the process,” he said.

The Long Term Deficit
Under Obama’s budget plan, annual deficits through fiscal year 2021 will add a combined $7.2 trillion to the federal debt – including lofty deficits of $1.6 trillion this year and $1.1 trillion in 2012, and lesser deficits of $768 billion in 2013, $645 billion in 2014 and $607 billion in 2015 and $649 billion in 2016.  The $1.6 trillion deficit projection for this year is equal to nearly 11 percent of the gross domestic product, making it the biggest gap between spending and revenues since the end of World War II.

Washington Editor and D.C. Bureau Chief Eric Pianin is a veteran journalist who has covered the federal government, congressional budget and tax issues, and national politics. He spent over 25 years at The Washington Post.