- The Washington Times - Sunday, February 22, 2009

President Obama is set to propose a budget Thursday that will cut the federal deficit in half by the end of his first term in office, the White House said Saturday, a significant pledge at the beginning of a week focused on restoring the nation’s long-term fiscal outlook.

The president’s budget blueprint will lay out a plan to reduce the deficit from its current $1.3 trillion, or 9.2 percent of the total economy, to $533 billion, which is forecast in the 2013 fiscal year to be 3 percent of the economy as measured by gross domestic product.

“Most of the savings will come from winding down the war in Iraq, increased revenue from those making more than $250,000 a year, and savings from making government work more efficiently and eliminating programs that do not work,” a White House official said about the budget proposal on the condition of anonymity.

The higher tax revenues will come largely through letting President Bush’s 2001 and 2003 tax cuts expire in 2010 and raising the top tax rate from 35 percent to 39 percent for the 2011 fiscal year.

More than $800 billion has been spent since 2003 on the wars in Iraq and Afghanistan, and Congress is set to consider a supplemental-spending bill for the two conflicts this spring that is currently estimated to be around $88 billion, according to news reports.

It is unclear to what extent Mr. Obama could be held accountable for his deficit promise during any re-election campaign. The 2013 fiscal year does not begin until Oct. 1, 2012, one month before the next presidential election, though Mr. Obama likely will have submitted his budget much earlier in the year.

This week represents a pivot for Mr. Obama, away from a focus on short-term economic problems and toward long-term fiscal problems. President Obama this week will open the debate on how to put the country on sounder long-term budget footing, while trying to pursue his own social programs.

“We have to engage in triage here. The first order of business was to get the economy going again. That will continue to be our focus,” said Rep. Chris Van Hollen of Maryland, one of the top Democratic lawmakers in the House. “But at the same time, we have to send a signal that we’re going to put the country back on a path toward sustainable fiscal policy.”

Mr. Obama will host a White House “fiscal responsibility summit” Monday, deliver an address to a joint session of Congress on Tuesday, and submit his budget blueprint Thursday.

In his weekly radio/Internet address Saturday, Mr. Obama said that the fiscal summit will “discuss how we can cut the trillion-dollar deficit that we’ve inherited.”

The week’s events also will likely reveal how Mr. Obama plans to balance his campaign-spending promises with the realities of a federal budget dramatically out of kilter. Most experts say that balancing act will make Mr. Obama’s bruising but successful push for the $787 billion economic-stimulus bill look like a minor speed bump.

Mr. Obama’s decision to discuss America’s long-term economic outlook has been praised by groups such as the Peter G. Peterson Foundation, a fiscal-responsibility nonprofit running TV ads Sunday morning on the nationally televised news talk shows.

The ads use the analogy of a ship headed toward an iceberg to illustrate that “there’s a much larger threat” than the current economic crisis that the country currently can see: “$56 trillion in unfunded retirement and health-care obligations, and the overreliance on foreign lenders that endanger us all.”

The group is calling on the Obama administration to set up a bipartisan commission to deliver recommendations on how to tackle the entitlement issue.

A White House official Saturday declined to take a position on that idea.

About 78 million baby boomers are set to enter retirement and start receiving Social Security and Medicare in the next 10 years. That is one of the main reasons that entitlement spending is set to gobble up 18 percent of the economy, instead of the 8 percent it currently consumes, according to Brian Riedl, an economist at the conservative Heritage Foundation.

By comparison, the entire federal budget of around $3 trillion currently takes up about 22 percent of the economy, as measured by the gross domestic product.

Budget scholar Alex Brill said that the only way to keep the gap between revenues and spending from exploding is through “some combination of tax increases or spending cuts, or one over the other.”

“There is no magic bullet, no pain-free solution. It takes tremendous political will to face up to these challenges for any political party,” said Mr. Brill of the conservative American Enterprise Institute.

Mr. Riedl estimates that if tax increases alone were depended on to fix the problem, each household would have to pay roughly $12,000 more a year.

White House press secretary Robert Gibbs conceded Friday that the U.S. faces “an unsustainable path long term in our budgets.”

But while the summit on Monday has sessions on health care and Social Security, the language from Mr. Obama and administration officials about the week ahead has focused mostly on the deficit.

Mr. Gibbs said that Thursday’s budget rollout will reveal “a deficit far bigger and far redder than what might have first been imagined, because for many years we’ve used tricks and gimmicks to mask the size of our irresponsibility.”

Mr. Obama has promised a budget that is “sober in its assessments, honest in its accounting.”

Mr. Riedl said he hopes that Mr. Obama restrains the growth of non-defense discretionary spending - spending that is not legally required - to a 4 percent rate. It grew by more than that under President Bush in the three years after the Sept. 11, 2001, terrorist attacks, and in 2008, as he spent money in response to the economic crisis.

Another looming question is whether the current economic turmoil will allow Mr. Obama to move forward this year with health care and energy reforms that he promised during the presidential campaign.

Mr. Obama has said taxpayers should expect the deficit to grow in the short term as he tries to put the economy on sound footing, but has said that in the out years, he will rein in those numbers.

Mr. Bush repeatedly made similar promises during his early years, but explained away growing deficits as the result of a recession early in his tenure, of economic problems after Sept. 11, and of the cost to the government of fighting the war on terrorism.

Like Mr. Bush for most of his tenure, Mr. Obama’s own party controls Congress. Having just gained control of the federal spending process, congressional Democrats will pressure him to spend on favored social programs that they say were shortchanged under Mr. Bush.

Some Democrats have said they expect to pay for the new spending with tax increases on high-income taxpayers, and with cuts to defense spending. Mr. Obama will also need to reassure U.S. and foreign investors so that they maintain confidence in their holdings of bonds and Treasuries.

Mr. Obama is “going to have to show people that the string of budget deficits and the building of public debt we’re going to have is going to be reversed,” said Morris Goldstein, a former senior staffer at the International Monetary Fund who is now at the Peterson Institute for International Economics.

“If [investors] don’t believe you’re going to get back to even, or get your public debt down to somewhere where it was before the economic crisis, they’re going to ask for higher yields on U.S. public debt, and that could lead to a decline [in] the dollar,” he said.

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