Thursday, February 26, 2009

A new report reveals how difficult it will be for President Obama to increase spending on health care, energy and education while cutting the deficit in half.

Based on budget scenarios outlined by House Speaker Nancy Pelosi, California Democrat, federal budget deficits will average $870 billion for the next 10 years, according to a new analysis by the nonpartisan Congressional Budget Office (CBO).

The latest CBO deficit estimates do not include the costly policy initiatives in health care, energy and education that the president mentioned in his Tuesday speech before a joint session of Congress. Mr. Obama will detail some of those plans Thursday when he introduces his first 10-year budget blueprint.

The CBO’s estimates also do not include any extension of the temporary tax cuts that were contained in the $787 billion stimulus package that the president recently signed into law. Based on his campaign promises, Mr. Obama intends to extend several costly stimulus provisions well beyond 2011, when many of them are set to expire.

One of those provisions is the president’s “Making Work Pay” tax credit, which will cost $66 billion in fiscal 2010.

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On the other hand, the CBO estimates also exclude hundreds of billions of dollars in annual revenue from a carbon cap-and-trade system that Mr. Obama wants to implement to reduce greenhouse gas emissions.

“The CBO report shows that Obama’s goal of reducing the deficit to $533 billion in 2013 is doable, but it won’t be easy,” said Stan Collender, a longtime budget analyst who is now a partner at Qorvis Communications.

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It will require a lot of discipline, he said, but cutting about $200 billion from CBO’s 2013 deficit estimate of $745 billion can be achieved if deficit reduction begins in earnest in 2011.

“The economy is the big ‘if,’ ” Mr. Collender said. “If it takes several years to get out of this economic mess, then deficit reduction won’t even start. Nor should it.”

Those projections are based on policy guidelines outlined by Mrs. Pelosi and House Budget Committee Chairman John M. Spratt Jr., South Carolina Democrat.

Mrs. Pelosi and Mr. Spratt asked the CBO to calculate deficits over the next 10 years based on the following assumptions:

- The 190,000 troops deployed in Iraq and Afghanistan in 2009 would decrease to 75,000 by 2013 and thereafter.

- The alternative minimum tax would continue to be “patched” each year through 2019 to ensure that the AMT would not ensnare tens of millions of middle- and upper-middle-income families who would otherwise have to pay it.

- The 2001 and 2003 tax cuts for individuals earning more than $200,000 and couples earning more than $250,000 would be canceled.

- The estate tax would remain at its 2009 level, which applies a 45 percent tax rate on estates of more than $3.5 million for individuals and $7 million for couples.

- Discretionary spending, which excludes interest and entitlements like Social Security and Medicare, would remain at the 2009 level of $1.012 trillion, adjusted for inflation.

“They obviously need to do much more than draw down troops in Iraq and eliminate the Bush upper-income tax cuts,” said Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities. “Getting to a deficit if $533 billion by 2013 will be a major challenge.”

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