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Obama's First Budget Seeks To Trim Deficit

Plan Would Cut War Spending, Increase Taxes on the Wealthy

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By Lori Montgomery and Ceci Connolly
Washington Post Staff Writers
Sunday, February 22, 2009

President Obama is putting the finishing touches on an ambitious first budget that seeks to cut the federal deficit in half over the next four years, primarily by raising taxes on businesses and the wealthy and by slashing spending on the wars in Iraq and Afghanistan, administration officials said.

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In addition to tackling a deficit swollen by the $787 billion stimulus package and other efforts to ease the nation's economic crisis, the budget blueprint will press aggressively for progress on the domestic agenda Obama outlined during the presidential campaign. This would include key changes to environmental policies and a major expansion of health coverage that he hopes to enact later this year.

A summary of Obama's budget request for the fiscal year that begins in October will be delivered to Congress on Thursday, with the complete, multi-hundred-page document to follow in April. But Obama plans to unveil his goals for scaling back record deficits and rebuilding the nation's costly and inefficient health care system tomorrow, when he addresses lawmakers and budget experts at a White House summit on restoring "fiscal responsibility" to Washington.

Yesterday in his weekly radio and Internet address, Obama said he is determined to "get exploding deficits under control" and said his budget request is "sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don't, and restoring fiscal discipline."

Reducing the deficit, he said, is critical: "We can't generate sustained growth without getting our deficits under control."

Obama faces the long-term challenge of retirement and health programs that threaten to bankrupt the government years down the road, as well as the more immediate problem of deficits bloated by spending on the economy and financial system bailouts. His budget proposal takes aim at the short-term problem, administration officials said, but also would begin to address the nation's chronic budget imbalance by squeezing savings from federal health programs for the elderly and the poor.

Even before Congress approved the stimulus package this month, congressional budget analysts forecast that this year's deficit would approach $1.2 trillion -- 8.3 percent of the overall economy, the highest since World War II. With the stimulus and other expenses, some analysts say, the annual gap between federal spending and income could reach $2 trillion when the fiscal year ends in September.

Obama proposes to dramatically reduce those numbers, said White House budget director Peter Orszag: "We will cut the deficit in half by the end of the president's first term." The plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion by 2013, he said -- still high but a more manageable 3 percent of the economy.

To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, a senior administration official said. The budget assumes continued spending on "overseas military contingency operations" throughout Obama's presidency, the official said, but that number is lower than the nearly $190 billion budgeted for Iraq and Afghanistan last year.

Obama also seeks to increase tax collections, mainly by making good on his promise to eliminate some of the temporary tax cuts enacted in 2001 and 2003. While the budget would keep the breaks that benefit middle-income families, it would eliminate them for wealthy taxpayers, defined as families earning more than $250,000 a year. Those tax breaks would be permitted to expire on schedule in 2011. That means the top tax rate would rise from 35 percent to 39.6 percent, the tax on capital gains would jump to 20 percent from 15 percent for wealthy filers and the tax on estates worth more than $3.5 million would be maintained at the current rate of 45 percent.

Obama also proposes "a fairly aggressive effort on tax enforcement" that would target corporate loopholes, the official said. And Obama's budget seeks to tax the earnings of hedge fund managers as normal income rather than at the lower 15 percent capital gains rate.

Overall, tax collections under the plan would rise from about 16 percent of the economy this year to 19 percent in 2013, while federal spending would drop from about 26 percent of the economy, another post-World War II high, to 22 percent.

Republicans, who are already painting Obama as a profligate spender, are laying plans to attack him on taxes as well. Even some nonpartisan observers question the wisdom of announcing a plan to raise taxes in the midst of a recession. But senior White House adviser David Axelrod said in an interview that the proposals reflect the ideas that won the election.

"This is consistent with what the president talked about throughout the campaign," and "restores some balance to the tax code in a way that protects the middle class," Axelrod said. "Most Americans will come out very well here."

The budget also puts in place the building blocks of what administration officials say will be a broad restructuring of the U.S. health system, an effort aimed at covering some of the estimated 46 million Americans who lack insurance while controlling costs and improving quality.

"The budget will kick off or facilitate a focus on getting health care done this year," the senior official said, adding that the White House is planning a health care summit. The event has been delayed by former senator Thomas A. Daschle's decision to withdraw from consideration as health secretary because of tax problems, a move that left Obama without a key member of his health team.

Administration officials and outside experts say the most likely path to revamping the health system is to begin with Medicare, the federal program for retirees and people with disabilities, and Medicaid, which serves the poor. Together, the two programs cover about 100 million people at a cost of $561 billion in 2007. Making policy changes in those programs -- such as rewarding physicians who computerize their medical records or paying doctors for results rather than procedures -- could improve care while generating long-term savings, experts say.

Obama's budget request would create "running room for health reform," the official said, by reducing spending on some health programs so the administration would have money to devote to initiatives to expand coverage. The biggest target is bonus payments to insurance companies that run managed-care programs under Medicare, known as Medicare Advantage.

The Bush-era program has attracted nearly a quarter of Medicare beneficiaries to private health insurance plans that cover a package of services such as doctor visits, prescription drugs and eyeglasses. But the government pays the plans 13 to 17 percent more than it pays for traditional fee-for-service coverage, according to the Medicare Payment Advisory Commission, which advises Congress on Medicare financing issues.

Officials also are debating whether to permit people as young as 55 to purchase coverage through Medicare. That age group is particularly vulnerable in today's weakened economy, as many have lost jobs or seen insurance premiums rise rapidly. The cost would depend on whether recipients received a discount or were required to pay the full price.

In addition to the substantive proposals, Obama's team boasts of improving the budget process itself. For years, budget analysts complained that former president George W. Bush tried to make his deficits look smaller by excluding cost estimates for the war in Iraq and domestic disasters, minimizing the cost of payments to Medicare doctors and assuming that millions more families would pay the costly alternative minimum tax. Obama has banned those techniques, the senior official said.

Staff writer Shailagh Murray contributed to this report.



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