Obama Targets U.S. Deficit After Shattering All Recods
Budget Outline Would Shrink Gap in Half Partly Through Withdrawal from Iraq
FEBRUARY 23, 2009
By JONATHAN WEISMAN
Starting from a budget deficit that will shatter U.S. peace-time records, President Barack Obama will propose a budget blueprint Thursday that foresees cutting the red ink in half in four years, a senior administration official said Saturday.
Even before passage of his $787 billion stimulus plan, the president's budget writers foresaw an inherited deficit of almost $1 trillion, equivalent to 9% of the nation's gross domestic product. With the stimulus and Mr. Obama's proposed housing rescue, the deficit is likely to be well in excess of $2 trillion, according to private forecasts.
Mr. Obama will promise that he can shrink that total to $533 billion, or 3% of GDP, by 2013, primarily through savings from withdrawing combat forces from Iraq and allowing tax cuts to lapse in 2011.
The forecast for slight narrowing of the deficit will also rest on the assumption that the economy recovers from the current slump. The official declined to say how any additional spending on economic stimulus or bailouts of the financial or other sectors -- actions many economists consider inevitable -- would affect the upbeat deficit projection.
The budget also will detail some of the federal programs Mr. Obama will propose to eliminate or streamline, with more details to come in the spring, the administration official said.
After unveiling an economic rescue program with a cost likely to exceed one trillion dollars, the president is now eager to claim a commitment to fiscal rectitude over the long term. Monday, the White House convenes a summit on fiscal discipline, to begin tackling the burgeoning costs of entitlements such as Social Security and Medicare, address the tax code and look at budget rules to force austerity.
Tuesday night, an address to a joint session of Congress will focus on the shared sacrifices needed to tame a national debt that is nearing $11 trillion, counting the $4.3 trillion in borrowed funds from Social Security. And Thursday, Mr. Obama will unveil the budget blueprint that tips his hand on long-term tax, entitlement, pork, energy and health-care policies.
The $533 billion deficit in 2013 would include the low range of anticipated costs for his plan to offer near-universal health care. It also would include revenue from a planned greenhouse-gas-reduction effort in which businesses would have to purchase permits from the government to emit carbon dioxide and other emissions contributing to global warming. Subsidies for Medicare-managed care plans, known as Medicare Advantage, would be eliminated. Hedge-fund and private-equity managers would see their fees taxed as income, at 35% next year, not at the 15% capital-gains rate.
But some of the tax proposals that Mr. Obama campaigned on last year, such as immediately taxing the overseas earnings of U.S. companies, are drawing resistance from business. The offshore tax proposal alone could raise about $50 billion over 10 years.
"That will be the largest fight they have ever had with the business community," warned Kenneth Kies, a top Washington business-tax lobbyist. "And they will probably lose."
Mr. Obama took an uncompromising stand on such issues during the campaign, appealing to angry voters with his pledges to repeal tax breaks that he said rewarded corporations that retain earnings overseas. Experts state that the U.S. has the higherst net corporate tax rates of any major coutry.
But administration aides say the budget will go to unprecedented lengths to show the true extent of the government's dire fiscal condition. In a break from the budget policies of previous administrations, the Obama budget will account for future war costs in Iraq and Afghanistan while ignoring the future costs of entitlement programs. It will also will show the annual cost of staving off the growth of the alternative minimum tax, a levy imposed in 1969 to ensure the rich pay some taxes but increasingly threatening the middle class. The cost of that AMT "patch" was $70 billion this year.
The budget will also include the cost of avoiding cuts to physician reimbursements under Medicare, a budget-cutting measure approved in the 1990s but abrogated by Congress every year. And it will assume about $20 billion for disaster assistance every year, an assumption that has never been done before, although such emergency expenditures have become routine.
Including those will make the budget picture considerably worse, the administration official said. "But we're being honest, to an unprecedented degree," he added. "That is something that is very important personally to the president."
The budget also will show the cost of extending some of the programs in the two-year stimulus plan, such as President Bush's $800-per-couple Making Work Pay tax cut. It assumes the extension of the a few of the Bush tax cuts, such as cuts to all but the top two income-tax brackets. The estate tax, which is now scheduled for total repeal in 2010, will instead be preserved and extended permanently at the current levels, with an exemption on the value of estates below $3.5 million -- $7 million for couples -- and a tax rate of 45% on the value of estates above that level.
Meanwhile, over the weekend, an array of governors from fiscally prudent states said they would reject at least some of the funding available under the administration's economic-stimulus package, accentuating the divide over how to resuscitate the economy between spenthrifts and prudent money managers.
South Carolina Gov. Mark Sanford, chairman of the Republican Governors Association, said on "Fox News Sunday" that the $787 billion spending and tax-cut package would boost the national debt to dangerously high levels and throw money at projects that do little to spur new growth.
"We don't have a giant piggy bank that we can now raid now that times are tough," he said. "In essence we're digging yet another hole for ourselves."
Mr. Sanford and the other Republican governor on the show, Minnesota's Tim Pawlenty, also criticized other aspects of the Obama administration's economic policy.
Mr. Sanford said the mortgage-rescue plan was a "horrible idea" that rewarded irresponsible behavior by individual homeowners. Mr. Pawlenty pointed out that struggling American automakers should restructure their operations in bankruptcy court before they receive any additional government aid.
Democratic governors appearing on the Sunday news shows offered weak defence for the Obama administration's handling of the economic crisis and accused Republicans of being out of touch with the concerns of leftwing America.
Democrat Pennsylvania Gov. Ed Rendell claimed that significantly more government money has gone to the Wall Street firms that helped spark the current economic crisis. "Are we rewarding bad behavior there? You bet we are," the Democratic governor accused. "Because if we don't do it, the whole system collapses."
—Yochi J. Dreazen contributed to this article.
Write to Jonathan Weisman at jonathan.weisman@wsj.com
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