WASHINGTON – The US budget deficit will remain at levels not seen since the second World War, congressional experts said yesterday in a report that lays out the stark challenge facing President Barack Obama as he seeks to create jobs and cut spending.
In his state of the union speech today, Mr Obama, struggling in polls, is expected to propose a three-year freeze on domestic spending programmes and outline other measures to tame record budget deficits.
This could meet resistance from his fellow Democrats in Congress, who aim to bring down the nation’s 10 per cent unemployment rate through additional spending.
The non-partisan congressional budget office said the deficit for the current fiscal year would come to $1.35 trillion (€1 trillion), a slight improvement on the $1.38 trillion it predicted last August. But it warned that rapidly rising federal debt could strangle the economy if Mr Obama and Congress do not raise revenue or cut spending.
The deficit is slightly lower than the record $1.4 trillion posted in the last fiscal year, which ended in September 2009, but at 9.2 per cent of gross domestic product (GDP), it still hovers at levels not seen since the second World War.
The decrease in the deficit will be little comfort to Mr Obama’s Democrats, who have seen little gratitude from voters after approving almost $1 trillion in spending last year to boost the economy. In the coming weeks they need to raise the government’s borrowing limit beyond the current $12.4 trillion, which will give Republicans another chance to paint them as out-of-control spenders.
“It appears that the sky is the limit for this tax-spend-and-borrow Democratic majority,” said Senator Judd Gregg, the most senior Republican on the budget committee.
Democrats say most of the debt was racked up before Mr Obama took office as his predecessor, George W Bush, cut taxes while pursuing wars in Iraq and Afghanistan and set up an expensive prescription drug benefit.
The report “confirms that the recession inherited from the Bush administration continues to erode the budget’s bottom line”, House of Representatives budget committee chairman John Spratt, a Democrat, said. The congressional budget office projected that deficits would shrink to below 3 per cent of GDP by the middle of the decade, a level many experts view as sustainable since it will be in line with economic growth.
But the projection assumes that Congress will let several tax cuts expire at the end of the year as scheduled, which is not likely. Steny Hoyer, the number two Democrat in the House, said yesterday that Democrats would seek to preserve middle-class tax cuts.
The cumulative impact of years of overspending would catch up eventually, the budget office warned. Interest payments will “skyrocket” – more than tripling over the coming decade to $723 billion a year. This would crowd out spending on education, transportation and other areas that would strengthen the economy.
The rising cost of healthcare and retirement programmes over the coming decade are also likely to eat up an increasing share of the budget, the budget office said.
Democrats had hoped their sweeping healthcare reform proposal would curb costs of government health programmes, but that measure is in limbo after Massachusetts last week voted in a Republican as senator, costing the Democrats their 60-seat supermajority.
Budget-cutting measures could also conflict with the Democrats’ other top priority of bringing down the 10 per cent unemployment rate. A jobs Bill that passed the House in December carries a price tag of $155 billion, and the Senate is preparing a similar measure.
Another deficit-controlling effort suffered a setback yesterday when the Senate rejected a proposed bipartisan taskforce that would have examined ways to bring the budget under control.
The White House is expected to propose a similar commission, but it faces scepticism from Republicans. – ( Reuters)