President Barack Obama’s $3.8 trillion fiscal 2011 budget puts an emphasis on job creation with $100 billion in additional stimulus spending, along with higher taxes for the wealthy in an attempt to narrow the deficit.
The spending blueprint forecasts this year’s budget shortfall will hit a record $1.6 trillion, following a $1.4 trillion deficit in 2009. The 2011 deficit, for the fiscal year that starts October 1, is predicted to be $1.3 trillion, with deficits remaining above $700 billion for the rest of the decade, according to the projections.
The president spelled out plans to offset spending by $1.2 trillion over 10 years, partly through a freeze on many domestic programs and by imposing more than $800 billion in higher taxes and fees on those earning more than $250,000, on banks that benefited from the financial industry bailout and by repealing tax breaks for the oil, gas and coal industries.
Obama, in a budget message to Congress, called job creation “an urgent priority” with the unemployment rate expected to average 10 per cent through this year.
“There are still too many Americans out of work,” Obama said. “Until our businesses are hiring again and jobs are being created,” Obama said “this recovery will not be finished.”
The president will make remarks on the budget later this morning.
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The plan for the fiscal year that begins October 1 reflects the administration’s struggle to boost the economy and job growth — both top concerns of voters — while tightening the government’s belt to reduce deficits in the years ahead. It is subject to approval — and modification — by Congress.
“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 in a briefing.
An economic outlook released by the White House shows the US economy will grow 2.7 per cent this year and 3.8 per cent next year. The unemployment rate will average 10 per cent in 2010, declining to 9.2 per cent next year, suggesting the administration expects employers will be slow to add workers. The jobless rate won’t dip below 6 per cent until 2015, the forecast showed.
Inflation is forecast to be 1.9 per cent this year, declining to 1.5 per cent next year.
The deficit forecast for the current year represents 10.6 per cent of the US gross domestic product, making it the biggest by that measure since World War II, according to administration figures. The White House goal has been to reduce the deficit to about 3 per cent of GDP, which most economists say is sustainable. The budget, though, predicts it’ll average 4.5 per cent over 10 years.
“The economic conditions were much worse” than thought when Obama became president on January 20, 2009, Orszag said in a Bloomberg Television interview.
To address the shortfall, the administration wants to impose a three-year freeze in “discretionary” spending outside of defense and security. The freeze won’t be across-the-board. Some programs, such as education and research and development, would get as much as 6 percent budget increases. Nine federal departments, including Agriculture, Commerce and Health and Human Services, would see their budgets shrink.
Obama’s plan also calls for creating a special debt commission to recommend steps to cut the deficit and tougher budgeting rules in Congress.
The result would be a deficit that declines next year to $1.27 trillion and to $828 billion in 2012, according to a summary provided by the administration. In subsequent years, though 2020, the annual deficit would still total between $700 billion and $1 trillion. By 2020, the publicly held debt would approximately double to $18.5 trillion, according to estimates.
Interest cost on the federal debt, reflecting the surge in spending for wars, tax cuts and the costs of the recession will quadruple to more than $800 billion by 2020, budget figures showed.
Orszag said the administration intends to slowly phase in its deficit-reduction plans, saying cutting too much too soon might stifle the economic recovery.
“The worst thing we could do is act too quickly and throw the economy back into recession,” Orszag said. “But we do need to be starting, and so that’s why you see this selective approach where we are beginning the process in certain components of the budget.”
The plan calls for extending several elements of last year’s economic stimulus as part of either a new jobs package or through subsequent legislation. It proposes spending $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 is set to expire this year.
Obama proposes to make permanent the Build America Bonds programme, in which the federal government subsidises infrastructure projects by picking up the tab for 35 per cent of the interest costs from taxable bonds issued by local governments. It calls for reducing that subsidy to 28 per cent. The budget would also spend $25 billion to provide state governments with six additional months of help paying their Medicaid bills.
The bulk of the higher taxes would come by allowing tax cuts passed under former President George W Bush for those earning more than $250,000 to lapse at the end of this year. That would raise $678 billion, according to the administration.
Top tax rates would increase to 36 per cent and 39.6 per cent, from the current 33 per cent and 35 per cent. The tax on capital gains and dividends would rise to 20 per cent from 15 per cent now, beginning January 1, and there would limits on the wealthy taking itemised deductions.
A fee imposed on 50 of the biggest financial firms such as JPMorgan Chase & Co and Bank of America Corp would raise another $90 billion. Eliminating tax breaks for fossil-fuel industries would produce another $40 billion.
The administration also proposes raising $24 billion to raising taxes on income earned by private equity and venture capital firms.
Freezing some domestic programs 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 estimates.
That would represent an abrupt shift in priorities. Non- defense discretionary spending is projected to grow this year by 7 per cent not including the costs of last year’s stimulus package, according to the CBO.
The increase totals 17 per cent once the stimulus package is included, according to CBO estimates. The administration’s plan also calls for 120 programme terminations, reductions and other savings it estimates would save $20 billion.
It would provide $33 billion in “emergency” funding this year to help pay for the administration’s troop buildup in Afghanistan. Next year, war costs would amount to $159.3 billion. The basic defense budget would amount to $549 billion, a 3.4 increase from this year.
The Department of Homeland Security would get a 2 per cent increase, veterans programs would get a 7 per cent budget increase and the State Department and other international programmes would see a 8 per cent hike.
The budget has more than doubled from $1.9 trillion in 2001, according the OMB’s historical data.