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As Obama Seeks Freeze, Deficit Seen Shrinking Slightly

WASHINGTON — The Congressional Budget Office is projecting a $1.3 trillion deficit for the current fiscal year, slightly smaller than last year, because of early signs of economic growth. But additional stimulus spending and tax cuts that the White House and Congress are considering could leave the shortfall greater than last year’s level.

In its annual report on the 10-year fiscal outlook, the nonpartisan budget office said that a $1.3 trillion deficit for fiscal 2010, which ends Sept. 30, would equal about 9.2 percent of gross domestic product.

That is an improvement from a $1.4 trillion deficit in fiscal 2009, representing nearly 10 percent of G.D.P. and the largest deficit measured against the size of the economy since World War II. The projected deficit for this year would be the second-largest, though additional spending or tax cuts could drive it into first place.

The budget office’s report provides Congress with the data to kick off a new budget-writing season. It comes as lawmakers and President Obama are under conflicting pressures from voters and markets. On the one hand are calls to reduce the deficit for the long term; on the other are calls to ensure that in the short term, the government does not contract so much that it knocks the still-fragile economy into a double-dip recession.

The deficit issue has risen to a public prominence not seen in two decades, reflecting the size of the shortfall, the dire future projections as health costs rise and the population ages, and the intensity of Mr. Obama’s opposition on the right. In dollar terms, though, a $1.3 trillion deficit this year would leave the shortfall back where it was when he took office from President George W. Bush.

The Senate on Tuesday, as expected, rejected legislation to create a bipartisan commission to devise a debt-reduction plan that Congress would have to vote on. While the vote was 53 to 46, 60 votes were required. Supporters argued that Congress has proved it will not take the politically painful action necessary. Many Republicans objected that a commission would lead to tax increases and some Democrats opposed the prospect of cuts in costly Medicare and Medicaid programs. Yet Mr. Obama is poised to create such a task force by executive order soon.

The vote on a commission proposal, meanwhile, was the price that fiscally conservative senators extracted from Congressional Democratic leaders as the price of voting for an increase in the $12 trillion debt limit. Without an increase, the government soon could not borrow to cover its obligations.

The budget office said the recession probably ended in mid-2009, but that recovery would be slow given the scale of the turmoil. It said that aggressive action by the Federal Reserve and the stimulus package that Mr. Obama and Congress enacted last year — a package that conservatives have caricatured as a bloated waste — “helped moderate the severity of the recession and shorten its duration.” As those measures wane, the budget office cautioned, the economy’s growth could be muted.

“Today’s report from C.B.O. confirms that the recession inherited from the Bush Administration continues to erode the budget’s bottom line,” said Representative John M. Spratt Jr., the Democrat of South Carolina who is chairman of the House Budget Committee. While economists warn against reducing deficit spending during an economic downturn, he added, “these projections are another reminder that as the economy recovers, it is critically important to take steps to address the long-term budgetary challenges our nation is facing.”

By contrast, Senator Judd Gregg of New Hampshire, the senior Republican on the Senate Budget Committee, said the new figures illustrated a lack of fiscal discipline. “These numbers are just staggering, and it appears that the sky is the limit for this tax-spend-and borrow Democratic majority,” Mr. Gregg said. “Despite all of the dire news about our mountain of debt, the spending spree continues, and only lip service is being paid to the issue of debt reduction.”

Administration officials announced on Monday that Mr. Obama, in his State of the Union speech, will call for a three-year freeze in spending on many domestic programs, and for increases no greater than inflation after that. The initiative, meant to signal his seriousness about restraining the deficit, provoked outrage among liberals in the president’s party because defense spending was exempted, while Republicans have mocked the proposal as too little, too late.

The freeze would cover the agencies and programs for which Congress allocates specific budgets each year, including air traffic control, farm subsidies, education, nutrition and national parks.

Security-related budgets for the Pentagon, foreign aid, the Veterans Administration and homeland security, would not be frozen; neither would the entitlement programs that make up the biggest and fastest-growing part of the federal budget: Medicare, Medicaid and Social Security.


The payoff in budget savings would be small relative to the deficit: The estimated $250 billion in savings over 10 years would be less than 3 percent of the roughly $9 trillion in additional deficits the government is expected to accumulate over that time.

The initiative holds political risks as well as potential benefits. Because Mr. Obama plans to exempt military spending while leaving many popular domestic programs vulnerable, his move is certain to further anger liberals in his party and senior Democrats in Congress, who are already upset by the possible collapse of health care legislation and the troop buildup in Afghanistan, among other things.

Fiscally conservative Democrats in the House and Senate have urged Mr. Obama to support a freeze, and it would suggest to voters, Wall Street and other nations that the president is willing to make tough decisions at a time when the deficit and the national debt, in the view of many economists, have reached levels that undermine the nation’s long-term prosperity. Perceptions that government spending is out of control have contributed to Mr. Obama’s loss of support among independent voters, and concern about the government’s fiscal health could put upward pressure on the interest rates the United States has to pay to borrow money from investors and nations, especially China, that have been financing Washington’s budget deficit.

Republicans were quick to mock the freeze proposal. “Given Washington Democrats’ unprecedented spending binge, this is like announcing you’re going on a diet after winning a pie-eating contest,” said Michael Steel, a spokesman for the House Republican leader, Representative John A. Boehner of Ohio.

The spending reductions that would be required would have to be agreed to by Congress, and it is not clear how much support Mr. Obama will get in an election year when the political appeal of greater fiscal responsibility will be vying with the pressure to provide voters with more and better services. The administration officials said the part of the budget they have singled out — $447 billion in domestic programs — amounts to a relatively small share, about one-eighth, of the overall federal budget.

But given the raft of agencies and programs within that slice, the reductions will mean painful reductions that will be fought by numerous lobbies and constituent groups. And not all programs will be frozen, the administration officials said; many will be cut well below a freeze or eliminated to provide increases for programs that are higher priorities for the administration in areas like education, energy, the environment and health.

The balancing act of picking winners and losers was evident on Monday at the White House. Mr. Obama and Vice President Joseph R. Biden Jr. outlined a number of new proposals that will be in the budget to help the middle class. They cover issues including child care, student loans and retirement savings.

Administration officials also are working with Congress on roughly $150 billion in additional stimulus spending and tax cuts to spur job creation. But much of that spending would be authorized in the current fiscal year, the officials said, so it would not be affected by the proposed freeze that would take effect in the fiscal year beginning Oct. 1.

It is the growth in the so-called entitlement programs — Medicare, Medicaid and Social Security — that is the major factor behind projections of unsustainably high deficits, because of rapidly rising health costs and an aging population.


But one administration official said that limiting the much smaller discretionary domestic budget would have symbolic value. That spending includes lawmakers’ earmarks for parochial projects, and only when the public believes such perceived waste is being wrung out will they be willing to consider reductions in popular entitlement programs, the official said.

“By helping to create a new atmosphere of fiscal discipline, it can actually also feed into debates over other components of the budget,” the official said, briefing reporters on the condition of anonymity.

The administration officials did not identify which programs Mr. Obama would cut or eliminate, but said that information would be in the budget he submits next week. For the coming fiscal year, the reductions would be $10 billion to $15 billion, they said. Last year Mr. Obama proposed to cut a similar amount — $11.5 billion — and Congress approved about three-fifths of that, the officials said.

The federal government’s discretionary domestic spending has grown about 5 percent on average since 1993, according to the administration. It spiked to about 27 percent from 2008 to 2009, however, because of the recession. The sudden increase reflected both the first outlays from the $787 billion stimulus package as well as automatic spending for unemployment compensation and food stamps that is triggered during an economic downturn.

The freeze that Mr. Obama will propose for the fiscal years 2011 through 2013 actually means a cut in real terms, since the affected spending would not keep pace with inflation.


According to the administration, by 2015 that share of the federal budget will be at its lowest level in a half-century relative to the size of the economy.

“A lot of our caucus won’t like it but I don’t think we have any choice,” said an adviser to Congressional Democratic leaders, who would only speak on condition of anonymity about internal party deliberations. “After Massachusetts and all the polls about independents’ abandoning us for being fiscally irresponsible, we can’t afford to be spending more than Obama.”

While the Democrats’ unexpected loss of a Massachusetts Senate seat in a special election last week gave new impetus to administration efforts to tackle the deficit, those efforts actually have been under way since last fall, when officials began early work on the 2011 budget.

Mr. Obama’s budget director, Peter R. Orszag, initially directed Cabinet secretaries and agency heads to propose alternative budgets — one with a freeze and another that cut spending by 5 percent. Months of internal arguments and appeals followed.

Source
Tags: barack obama, economy, michael steele
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