Obama: Need for stimulus trumps deficit fears

CHICAGO | President-elect Barack Obama’s campaign promise to cut spending has been waylaid by the reality of the economy, and he warned Monday that the deficit is going to grow and spending cuts will have to take a back seat now to stimulating the economy.

He also signaled he may forgo immediate tax increases on high-income families and instead wait for the Bush tax cuts to expire.

“We’re going to see a substantial deficit next year, bigger than we’ve seen in a very long time,” Mr. Obama said in his second news conference since winning the election. “I think American taxpayers are understandably concerned: If we already have a big deficit, and now we’re adding an additional stimulus, how are we going to pay for all that? The right answer is that we have to first focus on getting the economy back on track.”

Mr. Obama is scheduled to hold another news conference Tuesday to talk about his spending priorities and streamlining government, and is expected to name Peter Orszag to be budget director. He also said he would announce “meaningful cuts and sacrifices,” though it was not clear whether that would include specific line items or broad principles.

But with the deficit possibly reaching $1 trillion, or about 7 percent of gross domestic product, for fiscal 2009, budget analysts said cuts would be next to irrelevant.

“What we’re going to be doing is what I call a budget two-step. The first step is stimulus - don’t worry about the deficit. The second, whenever we recover, will be don’t worry about the economy, worry about the deficit,” said Stan Collender, a former congressional budget staffer who founded the Federal Budget Report.

Mr. Collender said the playing field for budget cuts is so small - possibly as little as $20 billion in a federal budget that should well exceed last year’s $3 trillion - that it doesn’t make sense in the short term for Mr. Obama to get into a fight with his former congressional colleagues over small-ticket items they want to protect.

“Why bother?” he said.

In his news conference, Mr. Obama laid out a hefty agenda for his first Cabinet appointment, tasking Treasury Secretary-designate Timothy F. Geithner and the rest of his new economic team with crafting a spending package to “jolt” the economy.

In addition to Mr. Geithner, president of the New York Federal Reserve Bank, the new team includes Lawrence H. Summers, a former Treasury secretary, as head of the National Economic Council; Christina D. Romer as director of the Council of Economic Advisers; and Melody C. Barnes, who will run the Domestic Policy Council.

During the third presidential debate, Mr. Obama said he was proposing “a net spending cut” and, when asked what specific programs would be chopped, listed one specific cut - $15 billion for the Medicare Advantage program, which offers extra benefits, but at a higher cost.

On Monday, though, he and his advisers said that with the economy in such poor shape, there’s little choice but to spend.

“Most economists, whether you’re a liberal or conservative, all agree that if you’re going to do a stimulus, or an economic-recovery package next year, you can’t pay for it at the same time. That just is not then a stimulus,” Obama transition adviser Bill Daley told CNN’s “The Situation Room,” adding that the long-term deficit was an issue to be addressed “over a very long term.”

Mr. Obama on Monday would not put a price tag on his preferred stimulus package, though some of his Democratic colleagues have said it should be at least $700 billion, but said he viewed it as a way to create the 2.5 million jobs he has promised to deliver and to make a long-term investment in the nation’s infrastructure.

Some critics have said Mr. Obama’s economic team is relying heavily on players who helped create the Wall Street atmosphere that contributed to the current financial woes, but lawmakers of both parties were comforted by Mr. Obama’s decision to use proteges of President Clinton’s centrist Treasury Secretary Robert E. Rubin.

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