WASHINGTON—President Barack Obama proposed a $3.8 trillion budget for fiscal 2011 that will add fuel to the debate over the size and scope of government. The plan includes big increases in personal and business taxes, modest spending cuts and increased outlays for education, defense and jobs initiatives.
The Obama administration has focused in the days leading up to Monday's formal release on proposals to cap so-called discretionary spending, roughly 17% of the total budget, as part of a plan to start narrowing the record $1.6 trillion gap between proposed budget outlays and tax receipts. But the budget plan calls for nearly $1 trillion in tax increases on upper-income families—largely through allowing Bush tax cuts to expire. Banks, bankers and multinational corporations would face new fees and levies. And oil companies would lose $39 billion in tax breaks.
Overall, Mr. Obama's budget plan would shrink the current deficit to $727 billion, or 4.2% of the gross domestic product, by 2013. But if annual deficits shrink, the total federal debt will keep growing. In all, the president's budget would add $8.5 trillion to the federal debt through 2020, pushing the debt as a percentage of GDP to 77%, up from 53%.
Kenneth Rogoff, a Harvard University economist who has studied other countries' experiences, says that level could push the U.S. toward a tipping point where interest rates could soar, the value of the dollar could plunge and the economy could face another crisis.
"We will hit a point where it comes on us very quickly, and you don't want to edge up to that point," Mr. Rogoff said. "Going beyond 80%, you're taking a real chance."
To hold the government to 77%, the president must rely on politically painful choices, including cuts to some domestic programs and large tax increases as the tax cuts of George W. Bush expire at year end. In that sense, the president is showing voters the choices they face to maintain the government they have.
In his budget message, the president narrowed the sweeping message of his first budget to a single issue: jobs. "Until our businesses are hiring again and jobs are being created to replace those we have lost—until America is back at work—my administration will not rest and this recovery will not be finished," he wrote.
Under the Obama plan, the budgets of the departments of agriculture, commerce, health and human services, housing and urban development, and justice would be cut.
The two top income-tax brackets would rise to 36% and 39.6% from 33% and 35%. For families earning at least $250,000, capital-gains and dividend tax rates would rise to 20% from 15%. All totaled, upper-income families would face $969 billion in higher taxes between 2011 and 2020. Oil and gas companies would face $37 billion more in taxes over that stretch.
Hedge-fund and private-equity traders who now see their fees taxed as capital gains would have their income taxed at income-tax rates, at a cost of $24 billion over the decade. And multi-national companies would pay an additional $122 billion on earnings overseas, a proposal Mr. Obama made last year that went nowhere amid furious business opposition.
Under the proposed budget, spending at Congress's discretion would decline, from $1.4 trillion to $1.38 trillion. But with rising interest, Social Security, Medicare and Medicaid costs, total government spending would rise by $85 billion, to $3.76 trillion.
The costs of war in Afghanistan and Iraq—budgeted as "overseas contingency operations"—are projected to increase by $46 billion over 2010-2011, above expectations contained in last year's budget.
The deficit for the current fiscal year, which ends Sept. 30, would eclipse last year's $1.4 trillion deficit, in part due to a proposed jobs package, which would cost $76 billion through 2015. The president wants $25.5 billion for cash-strapped state governments, to offset their funding of the Medicaid health program for the poor.
The budget embodies Mr. Obama's larger predicament of needing to contain the deficit without harming the economy, which remains fragile. The deficit has become a major political issue, as antigovernment activists swing independents against what they describe as Mr. Obama's big-government policies and Republicans try to regain the mantle of fiscal responsibility after the Bush years saw surpluses swing to deficits.
Republicans have said they aren't likely to cooperate with Mr. Obama on his deficit-reduction approach, opposing tax increases even as they attack Democrats for proposing cuts to Medicare.
"Over the past few weeks, President Obama has sounded ready to moderate his agenda—and has trumped his ostensible plans for fiscal discipline. Regrettably, the budget the administration today submitted to Congress is nothing more than a plan for more of the same—a very aggressive agenda of more government spending, more taxes, more deficits, and more debt—with just a few cosmetic budget maneuvers to give the illusion of restraint," said Rep. Paul Ryan of Wisconsin, the ranking Republican on the House Budget Committee.
Meanwhile, senior Democrats in Congress have expressed reluctance to cut spending with unemployment hovering at 10%.
Under the Obama budget, this year's $1.56 trillion deficit would fall to $1.27 trillion in the fiscal year that begins Oct. 1. It would drop to $727 billion in 2013 and $706 billion in 2014, the budget projects, on the assumption that the economy recovers, tax receipts start rising again with incomes, and stimulus spending drops off. With unemployment still at 10%, the president is finding it difficult to meet his promise to halve the $1.3 trillion deficit he inherited by January 2013.
The deficit would drop to the equivalent of 5% of GDP in 2013 through expected economic improvement alone. Policy changes proposed by the president, such as a proposed freeze in nonsecurity domestic spending, would shave an additional percentage point.
The deficit is forecast to stabilize below $800 billion between fiscal years 2015 and 2018 before beginning to rise again, according to the White House projections. The projected rise is due to the retirement of the baby boomers, which is expected to result in increased spending on Medicare and Social Security.
Mr. Obama plans to rely on a new debt commission, created by executive order, to come up with recommendations on how to meet his promise to bring the figure down to the equivalent of 3% of GDP by 2015, according to budget analysts briefed on the proposal.
A bipartisan 18-member debt commission would forward any deficit-reduction proposals they come up with to Congress after this year's midterm elections. Issues the panel would face would include how to cut the deficit further in the short term and how to rein in long-term growth of entitlement programs, such as Medicare, Medicaid and Social Security. Commission members would have to come up with cuts of $190 billion in 2015 to meet the president's target.
Congressional leaders have promised the president that they would submit the panel's recommendations to an up-or-down vote in the lame-duck session of Congress, after the elections but before the newly elected House and Senate take office.
White House officials say they are ready to make some tough choices to get the deficit under control. White House communications director Dan Pfeiffer wrote on the White House Web site this weekend that the president's budget would propose to terminate or cut back more than 120 programs, saving about $20 billion.
The proposals include consolidating 38 education programs into 11, cutting the National Park Service's Save America's Treasures and Preserve America grant program, and eliminating the Advanced Earned Income Tax Credit, which allows low-wage workers to get tax-credit checks in advance but which is rife with abuse, White House officials said.
The Brownfields Economic Development Initiative, which converts decayed former industrial sites to new uses, would be cut, and payments ended to states to restore abandoned mines, many of which have been long cleaned up.
But some of those efforts, such as the abandoned mines and Advanced Earned Income Tax Credit cuts, were proposed last year in Mr. Obama's first budget. They were ignored by Congress. Other planned cuts are presidential perennials, attempted without success by Presidents Bill Clinton and George W. Bush before Mr. Obama, such as eliminating whaling partnerships and implementing deep cuts to the Army Corps of Engineers.
The president is also expected to call for halting the National Aeronautics and Space Administration's plan to return astronauts to the moon, a tough sell in vote-rich Florida.
"There's no question there's a range of domestic discretionary that can be scaled back," said one Democratic budget analyst. "Politically, they will never get through."
Meantime, the president will ask for large increases in spending on education and civilian scientific research, according to analysts who have been briefed on the budget plans.
Mainly, the president plans to rely on the budget commission and budget rules in an effort to try to force Congress's hand, budget analysts said. The budget assumes the enactment of pay-as-you-go rules that would force any tax cut or spending increase to be offset by tax increases or spending cuts.
Isabel Sawhill, a budget expert at the Brookings Institution, criticized the president's goal—a deficit of 3% of GDP long after the recession has ended—saying it amounted to "defining deficits down."
"The pay-go rules will make it more difficult for Congress to dig the hole deeper but won't affect currently projected red ink; and the commission will likely be a paper tiger," she wrote on Friday. "In short, these proposals will still leave us with unsustainable deficits as far as the eye can see. It is depressing to discover that we can no longer even aspire to balance the budget once the recession is over."
Source: By JONATHAN WEISMAN