WASHINGTON – President Obama, pivoting at midterm from costly economic stimulus measures to deficit reduction, on Monday released a fiscal year 2012 budget that projects an annual deficit of more than $1 trillion before government shortfalls decline to “sustainable” levels for the rest of the decade.
Still, annual deficits through fiscal year 2021 will add a combined $7.2 trillion to the federal debt, Mr. Obama’s budget shows – after allowing for $1.1 trillion in deficit-reducing spending cuts and tax increases that the president proposes over the 10-year period. As he acknowledges, after 2021, an aging population and rising medical costs will drive deficits again to unsustainable heights.
The budget reflects Mr. Obama’s cut-and-invest agenda: It creates winners and big losers as he proposes to slash spending in some domestic programs to both reduce deficits and make room for increases in education, infrastructure, clean energy, innovation and research to promote long-term economic growth and global competitiveness.
The president is unveiling his budget to emphasize one of the winners: He will do so on Monday morning during a visit to a middle school and technology center in Baltimore.
Among the losers are programs that Mr. Obama has supported, even expanded, in the past: Popular programs for home-heating aid to poor families and for community services block grants would be cut in half, and a multi-state Great Lakes cleanup project would lose a quarter of its money compared to 2010.
Pell grants for needy college students would be eliminated for summer classes, and graduate students would start accruing interest immediately on federal loans, though they would not have to pay until after they graduate; both changes are intended to help save $100 billion over 10 years to offset the costs of maintaining Pell grants for 9 million students, according to administration officials.
Officials contrast the administration’s budgetary approach with that of House Republicans, who are voting this week to slash the current year’s spending by much larger amounts, sparing few programs from cuts and increasing spending on none.
“The debate in Washington is not whether to cut or to spend,” said a senior administration official on Sunday, speaking on condition of anonymity to brief reporters on the budget in advance of Mr. Obama’s Monday announcement of the spending plan. “We both agree we should cut. The question is how we cut and what we cut.”
For the administration’s part, the official said, “It requires cutting programs that in a different environment we would not want to cut.”
For the current fiscal year 2011, which ends Sept. 30, the Obama budget projects a deficit of more than $1.6 trillion, a level equal to nearly 11 percent of the gross domestic product, making it the largest shortfall since the end of World War II. That projection has swelled recently mostly due to the big tax cut deal that Mr. Obama and Congressional Republican leaders agreed to in December to spur the still-fragile economic recovery. It included a payroll tax cut this year for all Americans.
The deficit for fiscal year 2012 is projected to be more than $500 billion less, $1.1 trillion, due largely to the end of some of those tax cuts and of the two-year stimulus package that Mr. Obama signed into law soon after taking office. Economic growth and deficit-reduction measures account for a lesser share of the expected improvement.
The 2012 deficit will be the fourth and final year it is projected to exceed $1 trillion.When Mr. Obama took office in January 2009, the deficit for that year was projected to be – and ultimately was -- $1.3 trillion. A similarly large shortfall followed for 2010. After this year’s spike to $1.6 trillion, the president’s budget charts a decline from the trillion-dollar level after 2012 -- to a low of $607 billion in fiscal year 2015 -- before the annual deficits, in dollars, start inching up again.
Compared to the size of the economy, as economists prefer to measure, the annual deficits would decline from a projected 10.9 percent of gross domestic product this year to 7 percent in 2012. By 2015, Mr. Obama projects, the deficit would be just above his target of 3 percent – the level that many economists consider sustainable because it means deficits are not growing any faster than a healthy economy.
Of the $1.1 trillion in net deficit reduction that Mr. Obama claims over the next decade with his budget, two-thirds would be from cuts in spending and a third from higher revenues.
The lower spending mostly would derive from Mr. Obama’s proposed five-year freeze of the same narrow category of so-called non-security discretionary spending that Republicans are cutting. His freeze would save an estimated $400 billion through 2021.
Mr. Obama also would reduce the Pentagon’s five-year spending plans by $78 billion, reflecting savings recommended by his Defense secretary, Robert Gates. Separately, war costs are declining, administration officials said, largely due to the withdrawal of troops from Iraq.
Neither Mr. Obama nor Republicans are tackling the large entitlement programs – Medicare, Medicaid and, to a lesser extent, Social Security -- whose growing costs are driving projections of unsustainable long-term debt. But Mr. Obama does propose to save $62 billion from Medicare and Medicaid by squeezing care-providers’ reimbursements and expanding federal health programs’ use of generic drugs.
But those savings, by the administration’s accounting, would offset for two years the costs of preventing a scheduled big reduction in payments to physicians who treat Medicare patients. Typically Congress just blocks the mandated pay cuts for doctors and simply adds the expense to the deficit.
Similarly, Mr. Obama proposes to stop another favorite Washington budget gimmick: Adding to the deficit the recurring costs of preventing the alternative minimum tax, which is intended for affluent taxpayers, from hitting middle-class households. He would offset the roughly $300 billion revenue loss from fixing the tax for three years, raising a like amount over 10 years by limiting deductions for upper-income people in the top two tax brackets.
That tax increase for affluent Americans would account for the bulk of the revenues that Mr. Obama counts in his $1.1 trillion of net deficit reduction. The rest includes $46 billion over 10 years from eliminating a dozen tax breaks for oil, gas and coal companies to offset the costs of clean-energy initiatives.