Obama's Budget Proposal Would Push Deficit to $1.75 Trillion

Thursday 26 February 2009

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by: William Branigin and Lori Montgomery, The Washington Post

President Obama unveiled a proposed $3.55 trillion budget for the coming fiscal year today. (Photo: Pablo Martinez Monsivais / AP)

President Obama today unveiled a proposed $3.55 trillion budget for the coming fiscal year that he said discards "dishonest" accounting practices of the past and makes "a historic commitment to comprehensive health care reform."

The plan would effectively raise taxes on the wealthiest Americans and trim Medicare costs to help pay for what the administration calls a $634 billion "down payment" on a universal health care program. It would also extend tax cuts for middle-class Americans while closing corporate tax loopholes and reducing some agricultural subsidies, officials said.

In addition to the budget for fiscal 2010, the administration also proposes a $3.94 trillion budget for the 2009 fiscal year that ends Sept. 30. The figure includes an additional $250 billion that could be used to bail out struggling banks, as well as $410 billion in an omnibus spending bill that the House approved this week to fund major government agencies through the remainder of the fiscal year. Congress has not yet passed a 2009 budget, but has funded the operations of the government with continuing resolutions through March 6.

Obama's spending plans would push the 2009 budget deficit to a massive $1.75 trillion, officials said this morning. The government's yearly shortfall would equal 12.3 percent of the nation's annual economic output. Such a percentage has not been seen since the end of World War II, when the deficit came to 21.5 percent of GDP.

The administration says about $1.2 trillion of that deficit was inherited from the Bush administration and that some of the rest comes from stimulus measures aimed a jump-starting the flagging economy.

According to Office of Management and Budget Director Peter Orszag, Obama has inherited "a pair of trillion-dollar deficits." One of them is the U.S. economy's shortfall in output, and the other is the budget deficit, he said.

"All told, we are showing $2.7 trillion in costs, in this budget, that were excluded from previous budgets," Orszag told reporters. "And I think that's a mark of the honesty and responsibility contained in this document."

Congressional Republicans immediately denounced Obama's budget proposal, saying it contains excessive spending and tax increases.

"I have serious concerns with this budget, which demands hardworking American families and job creators turn over more of their hard-earned money to the government to pay for unprecedented spending increases," Senate Majority Leader Mitch McConnell (R-Ky.) said in a statement.

"The American people deserve a budget that puts fiscal discipline and jobs first," said Rep. Mike Pence (R-Ind.). "The budget offered by the Obama administration fails on both counts." Calling the plan a "prescription for economic decline," he said Americans "know we cannot tax, spend and borrow our way back to a healthy economy."

The new budget includes nearly $534 billion for the Defense Department in 2010, up 4 percent from 2009. The administration is requesting $75.5 billion for the rest of 2009 to pay for the wars in Iraq and Afghanistan, and $130 billion for 2010.

Under the 2010 budget, the Army and Marine Corps increase in size, and military personnel get a 2.9 percent pay increase. Federal civilian employees receive increases of up to 2 percent.

"In keeping with my commitment to make our government more open and transparent, this budget is an honest accounting of where we are and where we intend to go," Obama said at the Eisenhower Executive Office Building next to the White House before the budget was officially released. He said previous budgets have "not told the whole truth" about spending and that "large sums have been left off the books," including war costs that have been funded by separate emergency supplemental appropriations.

"And that kind of dishonest accounting is not how you run your family budgets at home; it's not how your government should run its budgets either," Obama said.

He pledged to "go through our books ... to eliminate waste and inefficiency" in the full budget that will come out this spring. But he said his administration already has identified "$2 trillion in deficit reductions that will help us cut our deficit in half by the end of my first term." Obama yesterday described the sum as "savings," but administration officials said about half the money comes in the form of tax increases, leading to today's change in terminology. A large chunk of the rest comes from measuring Obama's plans against an unrealistic scenario in which the Iraq war costs $170 billion a year indefinitely.

To support an effort to break U.S. dependence on oil "controlled by foreign dictators," Obama said today, "we'll invest $15 billion a year for 10 years to develop technologies like wind power and solar power and to build more efficient cars and trucks right here in America."

He said his plan also builds on efforts to control "crushing health care costs" that he described as dragging down the economy, bankrupting families and making up the fastest-growing part of the budget.

"With this budget, we are making a historic commitment to comprehensive health care reform," Obama said.

White House officials said the $250 billion being added to the budget to shore up banks is considered a "placeholder," which the administration hopes not to have to spend - at least not in its entirety. But Obama made clear in his nationally televised address to a joint session of Congress Tuesday night that at least some additional funds will be necessary.

Aides say the government money could be used to purchase an additional $750 billion in troubled assets from struggling financial institutions, essentially doubling the government's Troubled Assets Relief Program. The government has already allocated $700 billion for bank relief. Because the government-purchased assets are eventually to be sold, however, the cost being included in the budget - and the amount that would ultimately be added to this year's deficit - is $250 billion, which represents the money being paid now minus what officials estimate they will get when they sell those assets. Administration officials, including Obama, have acknowledged that bank relief is not popular, but the president made clear that he sees it as necessary to buttress the economy. In his speech Tuesday, Obama tried to reassure the public that he understands taxpayers' anger over bank mismanagement and the need to pour billions of dollars of federal assistance into them.

"I promise you - I get it," he said. But he also said, "My job - our job - is to solve the problem."

The budget proposal, which must be approved by Congress, depends on the assumption that lawmakers can resolve some hugely contentious issues. And it relies on a few well-worn budget tricks.

The request Obama delivers to Congress today proposes to provide what administration officials are calling a down payment on a major expansion of health care coverage for the uninsured. It identifies $634 billion in tax increases and spending cuts to cover the cost of part of the program, but does not say how the administration hopes to raise the rest of the money - hundreds of billions of dollars more. "TBD," meaning "to be determined," has been penciled into categories for cost savings and benefit reductions.

Obama's budget also would make permanent a tax cut for the middle class enacted in the recent stimulus package. But to pay for it, the president counts on a big infusion of cash from a politically controversial cap-and-trade system, which would force companies to buy allowances to exceed pollution limits. Even if that plan is approved, some lawmakers have other ideas about how to spend the money.

In a presidential message preceding a summary of the budget, Obama laid out elements of the current economic crisis that he said warrant massive government spending this year and next. In addition to the loss of more than 3.5 million jobs in the past 13 months, he said, another 8.8 million Americans are underemployed, manufacturing employment has hit a 60-year low, capital markets are "virtually frozen," and "trillions of dollars of wealth have been wiped out" in the stock markets.

"This crisis is neither the result of a normal turn of the business cycle nor an accident of history," Obama said. "We arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies' executive suites to the seats of power in Washington, D.C. ... This irresponsibility precipitated the interlocking housing and financial crises that triggered this recession."

Saying that government has repeatedly failed to confront systemic problems as policymakers have chosen "temporary fixes," Obama declared: "The time has come to usher in ... a new era of responsibility.... This budget is a first step in that journey."

In a news conference, Orszag, the OMB director, said budget deficit reductions are achieved in part by allowing tax cuts for the wealthiest Americans to expire as scheduled at the end of 2010, the closing of "a variety of corporate tax loopholes," the "winding down" of the war in Iraq and the adoption of measures to make government more efficient. For example, he said, nearly $50 billion can be saved over 10 years by reducing Social Security errors and "improper payments."

A proposal to phase out a category of agricultural subsidy payments for large farms with more than $500,000 a year in revenue would save $10 billion over 10 years, Orszag said.

To help pay for the $634 billion program to expand health care coverage to some of the 48 million Americans who are currently uninsured, the administration would reduce "overpayments" to private insurance firms that cover Medicare beneficiaries by introducing a competitive bidding process, he said. He said this would save more than $170 billion over 10 years.

Christina Romer, chairman of the Council of Economic Advisers, told the same news conference that economic assumptions underlying the budget include a contraction of GDP this year by 1.2 percent.

She said the economy is expected "to bottom out sometime around mid-year 2009 and begin growing again by the end of the year." She forecast real GDP growth of 3.2 percent for 2010 and "more robust growth" from 2011 through 2013.

Romer said unemployment is forecast to rise in the first half of 2009, averaging just over 8 percent for the year as a whole. She said the rate "will come down unfortunately only slightly in 2010" but is projected to fall much more rapidly in 2011 and 2012 before ultimately settling at about 5 percent.

The budget requests can be seen on the Office of Management and Budget Web site.