Obama Budget Proposal Kicks Off Battle Over Spending Cuts, Tax Increases

U.S. President Barack Obama yesterday (Monday) sent to Congress his $3.7 trillion budget request for fiscal year 2012, kicking off a congressional battle to determine a balance of spending cuts and tax increases that could reduce the country's $1.6 trillion deficit.

The Obama budget plan intends to shrink next year's deficit to $1.1 trillion. The Congressional Budget Office (CBO) last month projected 2011's deficit to hit $1.5 trillion, although a new estimate Monday from the Obama administration pushed the total to $1.6 trillion, or 10.9% of gross domestic product (GDP). Next year will be the fourth consecutive year with a budget deficit of more than $1 trillion.

President Obama said his federal budget proposal aimed to "ask Washington to live within its means, while at the same time investing in our future."

"What we've done here is make a down payment, but there's going to be more work that needs to be done, and it's going to require Democrats and Republicans coming together to make it happen," said President Obama.

About two-thirds of President Obama's proposed deficit reduction is from spending cuts and the remaining one-third from tax hikes. The spending cuts affect a wide range of programs including spending for infrastructure, higher education, defense and farming subsidies.

What the proposal does not address is any significant change in such deficit-inducing programs as Social Security and Medicare/Medicaid. It also falls short of meeting the suggested changes from President Obama's fiscal commission. President Obama's deficit commission said in December that about $3.9 trillion in deficit reduction would be needed through 2020 to make significant changes in federal debt.

Republicans and critics are attacking the federal budget proposal's lack of aggressive spending cuts and the fact that President Obama will try to gain support for billion-dollar investment programs. But White House Budget Director Jacob Lew supported the plan's contents as an appropriate start to negotiations.

"I know that would make a lot of people happy for there to be a big, bold proposal," Lew told Bloomberg Television. "My experience over the last 30 years is that when you put a proposal out there, before you've laid the foundation for a bipartisan discussion, it actually doesn't move the process forward."

Many Republicans would have been happy with a bigger, bolder proposal with a more aggressive attack on government spending. House Republicans want to eliminate more than 100 government programs to save $61 billion this year, and have said they will not support tax increases.

U.S. Sen. Jeff Sessions, R-AL., told CNN's "American Morning" blog the cuts President Obama proposed do little, if anything, to fix the country's debt.

The "$1 trillion reduction is insignificant and does not get us off on the right course," Sessions said. "We are facing a fiscal crisis."

While the Obama administration is predicting the budget deficit to continue falling each year to reach $607 billion in fiscal year 2015, roughly 3% of the nation's GDP, the deficit will grow again after that as more and more people qualify for Social Security and Medicare each year. The deficit is expected to swell again by 2021 to $774 billion, according to the White House.

The budget request will reduce deficits until 2015 but adds a total $7.2 trillion to federal debt over the next 10 years.

Wide Range of Cuts

The federal budget proposal mixes spending cuts with tax increases and slashes the budgets of about half of all federal departments and agencies.

Some of the biggest cuts proposed in the plan include eliminating Pell Grants for college students' summer classes, ending a program that gives home-heating assistance to needy families, and stopping tax breaks for oil, gas and coal companies.

An End to the Spending Spree
The budget also cuts farm subsidies for the wealthiest farmers, saving $2.5 billion over 10 years. The change would affect 30,000 of the 1.2 million subsidy recipients, according to the U.S. Department of Agriculture.

President Obama also called for a five-year freeze on non-security discretionary spending. Critics were quick to point out that specific area of spending only accounted for 12% of all federal spending, whereas entitlement programs Social Security and Medicare/Medicaid will make up about 60%, or $2 trillion, of federal spending next year. By 2021, the programs will cost about $3.3 trillion, or 68% of spending.

The plan also revisits the hotly debated Bush tax cuts, and proposes to let the cuts expire for wealthier individuals earning more than $200,000 and married couples making more than $250,000.

Overall the budget calls for about $730 billion in new taxes for certain individuals and businesses over the next 10 years, while cutting $400 billion in taxes for middle- and lower-income families and other businesses.

In line with President Obama's State of the Union address in which he advocated strategic spending - or "investment" - in certain industries, the plan does outline spending initiatives sure to be attacked by Republicans and other budget critics.

The budget allots $53 billion over the next six years for high-speed rail projects, and $15.7 billion for developing wireless networks and high-speed Internet usage. It also proposes a National Infrastructure Bank to offer $50 billion in incentives for private investment in projects.

Other spending plans focus on clean energy programs, aiming to help put 1 million electric vehicles on the road by 2015 and increase buildings' energy efficiency by 20%.

The Budget Battle Begins

The $3.7 trillion budget request far exceeds Republicans' goal to spend about $2.9 trillion. Now the president and Congress face the arduous task of finding compromise in that $800 billion difference.

House Speaker Rep. John Boehner, R-OH, said the plan represented too much of an imbalance between spending and debt.

"The president's budget isn't winning the future, it's spending the future," Boehner said in a statement Monday morning. "Our goal is to listen to the American people and liberate our economy from the shackles of debt, over-taxation, and big government. That's why the new House majority will vote this week to cut $100 billion in discretionary spending over the next seven months - with more cuts to come - in contrast to the Obama administration, which has proposed no cuts to the current fiscal year's budget while simultaneously asking for an increase in the national debt limit."

Republicans and other proposal critics were also frustrated by President Obama's lack of detailed outlines to address structural deficits.

But analysts said this is President's Obama's negotiation starting point. It is the opening move in a long battle in Washington.

"This is all political pre-positioning," John Brady, senior vice president at MF Global in Chicago, told Reuters. "This is just the first serve in a match that will volley back and forth for a couple of weeks. Markets are quiet right now; we're not hearing a lot about the budget. It isn't really a tradable event right now, but we'll know more as the story unfolds. The odds of a government shutdown will be known by the end of the week."

The budget negotiations will come after Washington deals with the Obama administration's request to raise the nation's debt limit from $14.3 trillion, which is expected to be reached as early as April. After that decision is made, Congress will take months to hammer out the budget details.

U.S. Treasury Secretary Timothy F. Geithner told Congress the government would exceed its borrowing limits this year sometime between April 5 and May 31. Geithner said the Treasury can extend payment deadlines through "extraordinary measures," but the short-term default "would have catastrophic economic consequences."

Similar situations in the past have always ended with Congress increasing the debt limit to avoid drastic damage to U.S. creditworthiness, although the approaching deadline has many investors and analysts anxiously awaiting Congress' decision.

"I hope they aren't sleeping at night, because we really are playing with fire," Robert D. Reischauer, president of Washington-based research group the Urban Institute, told The New York Times.

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