President Barack Obama yesterday (Monday) unveiled a $3.8 trillion budget proposal that includes big tax increases on individuals and businesses, and expands the federal deficit by more than $5.5 trillion by the end of the decade, including a record $1.6 trillion next year.
The budget blueprint for the fiscal year that begins Oct. 1 reflects the administration's struggle to find a balance between containing the spiraling federal deficit with the need to boost the economy and create jobs – both of which figure to be political bombshells in the upcoming 2010 elections.
"We're trying to accomplish a soft landing in terms of our fiscal trajectory," Peter Orszag, director of the White House Office of Management and Budget, said at a press briefing.
But the budget is certain to add fuel to the debate over the size and scope of government. As expected, Republicans railed against the administration's big spending programs and tax increases.
In an interview with Bloomberg News, U.S.Rep. Paul Ryan, R-WI, the senior Republican on the House Budget Committee, called the budget "a plan for more of the same – a very aggressive agenda of more government spending, more taxes, more deficits and more debt."
As part of a plan to start narrowing the gap between proposed budget outlays and tax receipts the President's proposal revolves around a cap on so-called discretionary spending, roughly 17% of the total budget.
Freezing spending on programs outside of defense and security for three years and then holding it at the rate of inflation for the rest of the next decade would save $250 billion, the administration said.
But the budget plan also calls for nearly $1 trillion in tax increases.
Allowing the Bush tax cuts to expire for taxpayers earning $250,000 or more would raise $678 billion. Banks like Bank of America Corp. (NYSE: BAC) and JPMorgan Chase & Co. (NYSE: JPM) along with multinational companies like General Electric Co (NYSE: GE) would face $90 billion in new fees and levies. And oil companies like Exxon Mobile Corp. (NYSE: XOM) would end up losing about $39 billion in tax breaks.
Individual and family taxpayers would see the top two income tax brackets rise from 33% and 35%, to 36% and 39.6%. Capital gains and dividend tax rates for earners making at least $250,000 would rise from 15% to 20%. All totaled, upper-income families would face $969 billion in higher taxes between 2011 and 2020.
But even with the proposed tax increases, the budget deficit will continue to plague the government and its citizens.
Under Obama's budget plan, the deficit would peak at $1.6 trillion this year or 10.6% of gross domestic product (GDP). It would then gradually shrink to $706 billion, or below 4% of GDP by 2014.
But then the President's budget calls for it to drift up again. The 10-year cumulative deficit from the fiscal year 2011 to 2020 would add a whopping $8.5 trillion to the federal deficit, according The Financial Times, pushing the debt as a percentage of GDP up to 77%.
That level of debt is setting off alarm bells in some academic quarters.
Kenneth Rogoff, a Harvard University economist familiar with other countries' experiences, says the deficit could push the U.S. over an edge where interest rates soar, the value of the dollar plummets and the economy could fall into another financial crisis.
"We will hit a point where it comes on us very quickly, and you don't want to edge up to that point," Rogoff told The Wall Street Journal. "Going beyond 80% you're taking a real chance."
To keep the deficit to below 77% of GDP, the president will be forced to make politically painful choices, including the large tax increases and cuts to some domestic programs.
Under Obama's plan, the budgets of the departments of agriculture, commerce, health and human services, housing and urban development, and justice would be cut.
The plan also calls for eliminating 120 programs and consolidating 38 education programs into 11including cutting the National Park Service's Save America's Treasures program, White House officials said.
The president is also expected to ask Congress to halt funding for the National Aeronautics and Space Administration's plan to return astronauts to the moon, which will face tough sledding in vote-rich Florida.
The plan calls for $100 billion in additional stimulus spending as part of a new jobs package, including $61 billion to extend for one year the administration's "Making Work Pay" tax credit which provided $400 to individuals and $800 to couples.
It contains $33 billion in "emergency" funding this year to help pay for the administration's troop buildup in Afghanistan. Next year, war costs will reach $159.3 billion.
The basic defense budget would increase to $549 billion, which amounts to a 1.8% increase adjusted for inflation. The Department of Homeland Security would get a 2% increase.
The budget has more than doubled from $1.9 trillion in 2001, according the Office of Management and Budget's data.
News & Related Story Links:
Obama Offers $3.8 Trillion Budget With Focus on Jobs
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Obama unveils US budget plans
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White House Proposes $3.8 Trillion Budget