Obama plan foresees record $1.75 trillion deficit

WASHINGTON – Pledging "a new era of responsibility," President Barack Obama unveiled a multi-trillion-dollar spending plan Thursday that would boost taxes on the wealthy, curtail Medicare, lay the groundwork for universal health care and leave a string of deficits dwarfing any in the nation's history.

In addition to sending Congress his $3.55 trillion budget plan for 2010, Obama proposed more immediate changes that would push spending to $3.94 trillion in the current year. That would result in a record deficit Obama projects will hit $1.75 trillion, reflecting the massive spending being undertaken to battle a severe recession and the worst financial crisis in seven decades.

As part of the effort to end the crisis, the administration proposes boosting the deficit by an additional $250 billion this year, enough to support as much as $750 billion in increased spending under the government's rescue program for banks and other financial institutions. That would more than double the $700 billion bank bailout passed by Congress last October.

In his budget message, Obama sought to draw a clear distinction with the Bush administration, saying "the time has come to usher in a new era — a new era of responsibility" both in government and the private sector.

But Republicans contended Obama was avoiding hard choices in favor of exploding the deficit and raising taxes.

"This budget plan is once again a missed opportunity for American taxpayers — it raises taxes on all Americans, implements massive new spending and fails to make any tough choices to control the deficit," said Sen. Judd Gregg, R-N.H., the top Budget Committee Republican who was nominated by Obama to join his Cabinet as commerce secretary but then withdrew.

The administration called the request for additional bailout resources a "placeholder" in advance of a determination by the Treasury Department of what will actually be needed.

The spending blueprint Obama sent Congress was a 134-page outline with further details to come in mid to late April, when the new administration sends up the massive budget books that will flesh out the plan.

The plan balances efforts to fulfill Obama's campaign pledges to deliver tax cuts to the middle class, expand health care coverage and combat the economic crisis with an effort to keep a soaring deficit from becoming a permanent drag on the economy. However, Republicans assailed the budget for the tax increases, and some Democrats worried that Obama was not doing enough to get the deficit under control.

"I would give him good marks as a beginning, but we have to do a lot more to take on this long-term debt buildup," said Senate Budget Committee Chairman Kent Conrad, D-N.D.

"Everyone agrees that all Americans deserve access to affordable health care, but is increasing taxes during an economic recession, especially on small businesses, the right way to accomplish that goal?" asked House Minority Leader John Boehner, R-Ohio.

The $634 billion down payment on expanding health care coverage would come from a $318 billion increase over 10 years in taxes on the wealthy, defined as couples making more than $250,000 per year and individuals making more than $200,000. The tax increase would occur by reducing the benefit the wealthy get on tax deductions. As one example, taxpayers in the current top tax bracket of 35 percent would see their tax deduction for every $1 given to charity drop from 35 cents to 28 cents.

The other half of the money for expanding health care — $316 billion — would come from curtailing payments to hospitals and insurance companies under Medicare and drug payments under Medicaid.

To meet his pledge of tax cuts for the middle class, the president wants to make permanent the $400 annual tax cut due to start showing up in workers' paychecks in April as part of the $787 billion stimulus package just passed by Congress. Obama's budget also extends the middle class tax cuts passed by the Bush administration in 2001 and 2003. Those cuts were due to expire at the end of 2010. If Congress approves Obama's recommendations, the Bush tax cuts would expire only for couples making more than $250,000 per year.

The cost of the stimulus bill and the increased bailout support would push the deficit for this year to $1.75 trillion, nearly four times last year's record $455 billion and a percentage of the economy — just over 12 percent — not seen since World War II. The deficit would remain near $1 trillion over the next two years before dropping to $581 billion in 2012 and $533 billion in 2013, the year that Obama has pledged to cut the deficit he inherited in half.

However, to meet that goal, the administration's budget depends on optimistic projections that the economy, currently in the longest recession in a quarter-century, will come roaring back with economic growth of 3.2 percent next year and 4 percent-plus rates in the following three years, significantly higher than private economists are forecasting.

Christina Romer, head of the president's Council of Economic Advisers, defended the administration forecast, telling reporters at a briefing that the private forecasters may not be taking into account all of the efforts the government is employing to jump-start the economy.

She said in past downturns, the more severe the recession, the stronger the recovery from the slump.

Obama's budget projects $2 trillion in deficit reduction over a decade — split between tax hikes on wealthier Americans and trimming a variety of government programs ranging from subsidies paid to wealthy farmers to eliminating ineffective government programs. However, previous presidents have also sought to target wasteful government spending only to find the programs targeted had powerful supporters in Congress.

Obama's blueprint awards domestic agencies budget increases, on average, of 7 percent in 2010 over 2009 levels. The Pentagon would get a 4 percent boost, to $534 billion next year, but would then get increases of 2 percent or less over the next several years.

Obama's plan proposes to build up a $634 billion reserve fund he would use to expand health care coverage to some of the 48 million currently uninsured Americans currently. The fund would represent a little more than half the money projected to be needed to extend health insurance to all Americans.

Obama also asked for an additional $75 billion to cover the costs of wars in Iraq and Afghanistan through September, the end of the current budget year. The administration will also ask for $130 billion for Iraq and Afghanistan in 2010 and will budget the costs of operations in Iraq and Afghanistan at $50 billion annually over the next several years.

Obama's budget proposal would effectively raise income taxes and curb tax deductions on couples making more than $250,000 a year, beginning in 2011. By not extending former President George W. Bush's tax cuts for such wealthier filers, Obama would allow the marginal rate on household incomes above $250,000 to rise from 35 percent to 39.6 percent.

The plan also contains a contentious proposal to raise hundreds of billions of dollars by auctioning off permits to exceed carbon emissions caps, which Obama wants to impose on users of fossil fuels to address global warming.

The Medicare plan is sure to incite battles with hospitals, health insurance companies and drug manufacturers.

Some of the Medicare savings would come from scaling back payments to private insurance plans that serve older Americans, which many analysts believe to be inflated. Other proposals include charging upper-income beneficiaries a higher premium for Medicare's prescription drug coverage.

To raise the other half of the money for expanding health coverage, Obama wants to reduce the rate by which wealthier people can cut their taxes through deductions for mortgage interest, charitable contributions, local taxes and other expenses to 28 cents on the dollar, rather than the 35 cents they can claim now. Even more money would be raised if the top rate reverts to 39.6 percent, as Obama wants.

The $1.75 trillion deficit projected for this year would represent 12.3 percent of the gross domestic product, double the previous post-war record of 6 percent in 1983, when Ronald Reagan was president, and the highest level since the deficit totaled 21.5 percent of GDP in 1945, at the end of World War II.