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Obama budget projects record $1.6 trillion deficit

By Lori Montgomery
Washington Post Staff Writer
Monday, February 14, 2011; 4:26 PM

President Obama rolled out a $3.7 trillion budget blueprint Monday that would trim or terminate more than 200 federal programs next year and make key investments in education, transportation and research. The plan is aimed at boosting the nation's economy while reducing record budget deficits.

In a news conference at a Baltimore County middle school, Obama cast the document as a responsible alternative to the deep spending cuts that Republicans will urge in a vote this week on the House floor. Obama's plan would trim domestic spending by hundreds of billions of dollars over the next decade, striking hard at programs long favored by Democrats to make room for targeted increases in energy and medical research, corporate research and development and a new network to bring high-speed Internet access to 98 percent of Americans.

However, Obama also would rely heavily on new taxes, to a degree unacknowledged by administration officials in recent days. His budget request calls for well over $1.6 trillion in fresh revenue over the next decade, much of it through higher taxes on the wealthy and businesses.

Households with income of more than $250,000 a year would immediately see new limits on the value of their itemized deductions. And starting in 2013, they would lose the lower tax rates and other breaks that were enacted during the George W. Bush administration and recently extended.

The president proposes to hit businesses with an array of proposals he has offered in the past, including an end to subsidies for oil and gas companies, new taxes on hedge fund managers and a $30 billion fee on financial institutions aimed at repaying taxpayers for the federal TARP bailout.

The cuts target defense, heating assistance and the environment.

The announcement was Obama's opening argument in what is likely to be months of debate with congressional Republicans who want to see deeper cuts.

He cast the reductions as necessary but also said that more funding for scientific research, innovation and education were essential to keep American competitive with other nations.

"It would mean cutting things that I care deeply about," Obama said. "But if we're going to walk the walk when it comes to fiscal discipline, these kinds of cuts will be necessary,"

He said that "while we are absolutely committed to working with Democrats and Republicans to find further savings ... we can't sacrifice our future in the process."

Obama described his education initiatives as "investments in the future" and said he would fight for more funding. His budget proposal includes $40 million for training math and science teachers in elementary, high school and college classrooms.

Although Obama seeks an overhaul of the corporate tax code to lower the 35 percent rate on corporate profits, his budget does not make that costly adjustment. Instead, it offers previous proposals to eliminate tax breaks for corporations that do business overseas, reaping $129 billion in new revenue through 2021.

Obama also directs Congress to develop a plan to pay for a new, multi-year transportation bill, a measure traditionally funded by increasing the federal tax on gasoline. "Bipartisan financing" for the transportation trust fund is likely to add another $328 billion to the revenue tally, raising total tax hikes in Obama's budget request to nearly $2 trillion through 2021.

The request drops one major proposal from previous budgets: Obama's plan to develop a system of tradeable vouchers for greenhouse gas emissions. The measure, which passed the House, came under fierce attack from the GOP and the industry and was never taken up by the Senate.

Obama's deficit-reduction strategies would do little to improve the immediate budget outlook. Obama projects that the deficit will hit a record $1.6 trillion this year - which, at nearly 11 percent of the economy, would be the largest since World War II. The bigger wave of red ink is caused in part by the recent bipartisan tax deal, which reduced payroll taxes this year for virtually every working American.

The annual deficit would recede to $1.1 trillion next year, as Obama's latest policies began to take effect - the fourth straight year of trillion-dollar deficits. Obama projects that the deficit would fall rapidly thereafter, settling around $600 billion a year through 2018, when it would once again begin to climb as a growing number of retirees tapped into Social Security and Medicare.

All told, Obama estimates that the nation would have to borrow an additional $7.2 trillion through 2021 under his policies, an improvement from previous projections that exceeded $9 trillion. His plan calls for annual deficits - and therefore annual borrowing - to stabilize at about 3 percent of the economy for much of the decade. The national debt would then level off at about 76 percent of economy, nearly double the debt burden the nation carried before the recent recession.

However, those figures are based on the assumption that the economy will grow 4 percent in 2012 and 4.5 percent in 2013 - well above most private and governmental projections.

Obama said the document represents a pivot toward fiscal responsibility after two years of increased spending to stabilize the ravaged economy.

"Now that the threat of depression has passed, and economic growth is beginning to take hold, taking further steps toward reducing our long -term deficit has to be a priority, and it is in this budget," Obama wrote. "We will not be able to compete with countries like China if we keep borrowing more and more from countries like China."

But Republicans blasted the document as a bait-and-switch, saying it fails to live up to recent assertions by White House budget director Jacob Lew that Obama would reduce deficits primarily by cutting spending.

"What we have here is a total abdication of leadership and talking points based on gimmicks and cooking the books," House Budget Committee Chairman Paul Ryan (R-Wis.) said in an interview. "To me, it's more than disappointing. I expected more taxes, but I also expected some serious spending controls or reforms, and we're getting none of it."

Although the budget request offers an important glimpse of the president's priorities - his first since Republicans regained control of the House in November - it is unlikely to have much influence in the budget debate on Capitol Hill. House Republicans plan to offer their own spending proposal for fiscal 2012, after attempting to push through sharp and immediate cuts to spending this year.

Democrats, who control the Senate, have vowed to block the GOP cuts, setting the stage for a battle that could shut down the government unless the two sides can agree by a March 4 deadline. For next year's budget, Senate Democrats are more amenable to Obama's approach. But they, too, are pursuing a bolder budget strategy in hopes of striking a bipartisan compromise that would go further to solve the nation's long-term problems.

"If we're going to get this debt down to a level that's sustainable, then we've got to do substantially more than $1 trillion worth of deficit reduction in the next decade. We just do," said Senate Budget Chairman Kent Conrad (N.D.).

A senior administration official said Obama's budget request maps "a sustainable path" that would stabilize government finances in preparation for a broader debate about how to tackle the biggest drivers of future deficits: Social Security and health care for the elderly, as well as a tax code that offers more in breaks and deductions than it collects in revenue.

Obama's budget makes clear that he will not take the lead in that debate: It contains no specific recommendations for tax or entitlement reform.

Senior administration officials pointed to two significant changes that would improve the budget outlook by eliminating long-standing gimmicks Congress has used to hide the true depth of the red ink. The first would cover the cost of adjusting Medicare to ensure that payments to physicians are not subject to steep reductions. The second would pay for adjustments to the alternative-minimum tax to prevent it from striking deep into the middle class over the next three years.

And with Republicans unwilling to consider changes in tax policy as part of their deficit-reduction effort, Obama challenges them to reconsider. If Congress would permanently fix the AMT, or pay for its provisions, after 2014, the nation's debt would start to shrink as soon as 2015.

The budget plan offers challenges for Democrats, as well. With voters clamoring for less spending, Obama is proposing cuts that many of his colleagues in Congress will find painful, lawmakers said.

A five-year freeze on domestic programs would reduce spending in that category to the lowest level, measured against the economy, since President Dwight D. Eisenhower left office in 1961. Half of all agencies would see their budgets reduced.

Among the cuts: Community development block grants would lose $300 million; low-income heating assistance would be sliced in half; $1 billion would be cut from large airport grants; nearly $1 billion would be trimmed from a fund that finances water treatment plans and other infrastructure projects. The Environmental Protection Agency took the biggest hit - a 13 percent cut from the 2010 budget. Among the reductions is a Great Lakes Restoration initiative, which would lose 25 percent of its funding.

Nearly 40 duplicative or inefficient education programs would be condensed into 11, and 13 more would be eliminated. Sixty duplicative transportation programs would be consolidated into five, and limited to making investments only if Congress agrees on a financing plan that would not increase the deficit.

The Pentagon would also take a hit of $78 billion over the next five years, and defense spending would increase only for inflation thereafter. Combined with the drawdown in Iraq, overall military spending would be cut by 5 percent in 2012, compared with Obama's fiscal 2011 request.

On Sunday, a senior White House official pointed to a trade-off that he called emblematic of the administration's efforts: a restructuring of the Pell grant program, a key initiative of the Obama administration, to cover the maximum $5,550 benefit for a growing number of eligible college and vocational students. Grant recipients are projected to increase from about 6 million in 2008 to more than 9 million in 2012.

Republicans attacked the blueprint based on early reports, saying it would do too little to satisfy the public hunger for smaller government.

"The president talks like someone who recognizes that spending is out of control, but so far it hasn't been matched with action. And his only solution to one of the most significant problems facing our country is to lock in spending at levels we all know are completely unsustainable," Senate Minority Leader Mitch McConnell (Ky.) said in a statement. "Americans don't want a spending freeze at unsustainable levels. They want cuts, dramatic cuts."

Democrats defended the president.

Obama's budget blueprint "strikes the right balance, offering tough cuts in a responsible manner," said Rep. Chris Van Hollen (Md.), the senior Democrat on the House Budget Committee. "Compared to the slash-and-burn Republican approach, this budget positions the president as offering a responsible approach to deficit reduction."

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