Written by Surplus of Ideas on February 25, 2010, 06:36 PM

Criticized by Republicans for raising taxes on wealthy Americans, Obama is under pressure to convince investors and vital creditors like China that he has a credible plan to control the U.S. deficit and debt over time.

"We won't be able to bring down this deficit overnight, given that the recovery is still taking hold," Obama said after laying out $3.8 trillion (2.38 trillion pounds) in spending plans for the fiscal year to September 30, 2011.

"We will continue, for example, to do what it takes to create jobs. That is reflected in my budget. It is essential," he said in a televised statement from the White House.

Financial markets largely ignored the budget, which was previewed in his State of the Union address last week, and will be subject to lengthy wrangling between U.S. lawmakers.

Obama's blueprint now goes to a Congress deeply split on how to handle the twin woes of a massive deficit and high unemployment amid a still fragile emergence from recession.

Lawmakers girding for the annual budget battle will be in no mood to anger voters ahead of congressional elections in November.

The budget forecast a $1.56 trillion deficit in 2010, or 10.6 percent of gross domestic product (GDP), up from a 9.9 percent share of GDP in 2009.

But the shortfall was forecast to shrink to 8.3 percent of GDP in 2011. By the time his term ends in January 2013, it would have halved from the level Obama inherited on taking office last year, keeping a key pledge. That supposes Obama gets Congress to agree to spending cuts and that the economy rebounds strongly enough to sharply lift tax revenues.

The deficit's rise in 2010 was partly due to the $787 billion stimulus package Obama pushed through Congress soon after taking office last year to fight the recession.

Obama, a Democrat, said he had inherited the financial mess from his Republican predecessor President George W. Bush but did not pretend that the budget would please many people.

"Budget day is like tax day -- it's never fun. No matter what, it's big numbers," he said.

REPUBLICAN IRE

But Republicans seized on the grim fiscal forecast to criticise Obama's handling of the economy.

Senator Judd Gregg, the top Republican on the Senate Budget Committee, warned the country was sinking into a "quagmire" of debt and said Obama's stimulus plan had failed to create jobs.

"These circumstances call for a bold, game-changing budget that will turn things around, put in place a plan to restrain spending, reduce the debt and tackle the big entitlement programs that are growing out-of-control," he said. "Instead, the president has sent us more of the same."

The budget outlined some expected savings from the reform of Medicare and Medicaid entitlement programs that care for elderly and poor Americans. But his health reforms have stalled in Congress and Obama did not dwell on healthcare in detail.

Republicans complain the projected improvements in the country's fiscal position come mainly through higher taxes and stronger growth, while spending emerges largely unscathed.

Obama plans to allow tax cuts to expire on affluent American families who make more than $250,000 a year, which is expected to raise $678 billion over the next decade.

He will extract $90 billion from big banks with a fee to recoup taxpayer losses for bailing out the industry during the financial crisis during 2008. Scrapping subsidies to oil, coal and natural gas companies will raise a further $40 billion.

Obama also plans to save $250 billion between 2011 and 2020 by curbing 120 federal projects, including $23 billion next year. These cuts included the country's powerfully symbolic space mission to return to the moon, but the White House says it will also invest more in education and research.

Although Obama submits the budget to Congress, actual decisions about how the government raises and spends money are made on Capitol Hill in a process that can last a year.

Polls show voters are worried by the weak condition of U.S. finances, and Obama plans to create a bipartisan fiscal commission to figure out options on taxes and spending.

GROWTH FORECASTS

Much of the improvement in the fiscal picture is driven by underlying forecasts in the budget for solid economic growth -- which will not necessarily be shared by all economists.

The economy is forecast to expand by 2.7 percent in 2010, but then pull at an above-average 3.8 percent in 2011 and rise above 4 percent for the following 3 years.

The budget also assumes unemployment will remain high, edging to 8.2 percent in 2012 from 10 percent this year, while inflation stays mild and interest rates rise only slightly.

Discontent over the jobless rate translated into political defeat for Obama's Democrats in an election last month for the U.S. Senate in Massachusetts, costing the Democrats a crucial Senate seat and foreshadowing potentially big losses for the party in the November congressional elections.

Unemployment is a key concern for voters who will elect all 435 members in the House of Representatives and more than a third of the 100 Senate members in November.

To boost jobs, Obama is setting aside $100 billion in 2010 in tax credits aimed at small businesses as well as investments in clean energy and infrastructure, before starting to tighten the country's fiscal belt the following year.

Economists say withdrawing policies aimed at boosting growth too soon helped prolong the Great Depression in the 1930s, a mistake Obama is determined to avoid repeating.

Democrats control both chambers in Congress. But with Republicans united in opposition to Obama's agenda, he still faces a struggle pulling together Democrats -- who badly need to show voters they are taking steps on jobs but at the same time face a voter backlash over aggressive spending measures taken to boost the economy.

"Part of the problem is a stalemated Congress and Senate that probably isn't in the mood to pass another stimulus package," said Carl Birkelbach, chairman and chief executive officer of Birkelbach Management in Chicago.

In another sign of the challenge Obama has already faced pushing through his domestic agenda in his first year in office, the budget dropped $646 billion in revenues from a cap-and-trade system to curb greenhouse gases -- signalling pessimism Congress will pass a climate bill with this provision intact.

Originally Posted Here