WASHINGTON (CN) – President Obama unveiled his $3.8 trillion budget Monday for fiscal year 2011. Despite a spending freeze and new pay-as-you-go legislation, it’s expected to produce a $1.3 trillion deficit in 2011 – the same deficit that had been projected for 2010 – underlying the difficulty and time needed to stabilize the budget and economy.
The budget and associated forecasts lay out a long road for the recovery and for job creation, with the administration expecting only a 2 percent unemployment drop over the next three years.
Despite steps that Obama has said he would take to reduce the deficit next year, a year without a deficit is still beyond the horizon and the accumulation of deficits is set to increase the national debt to 77 percent of the economy by the end of the decade.
The persistent deficit despite plans to tackle it beginning in 2011 draws attention to the president’s control over the budget – or lack thereof.
Congress and Obama control just $1.4 trillion of the 2011 budget. The rest of the $3.8 billion budget is driven by automatic spending for entitlement programs.
During a press conference, Office of Management and Budget Director Peter Orszag said that over the next decade, automatic stabilizers will weigh down the deficit with $2.5 trillion.
Even with Obama’s plans in 2011 to freeze spending and require that new spending or tax cuts be paid for, the deficit matches that predicted for 2010 before Obama proposed greater increases in spending and more tax cuts on small business.
In a phone interview, Research Director of the Committee for Economic Development Joseph Minarik remarked on the challenges in cutting the deficit. “The numbers coming out of this year’s budget are very close to the numbers coming out of last year’s budget,” he said.
Minarik – who has been appointed to the Bipartisan Debt Reduction Task Force that Obama has called for – said that with a near 80 percent national debt, like the one predicted for the end of the decade, the nation would have to spend about 4 percent of its gross domestic product just to service the debt. And with revenue at roughly 18 percent of the economy, a quarter to a fifth of government revenue “would be soaked up simply servicing the debt.”
“The more debt you have, the harder it is to get a handle on the situation,” he said.
The projected deficit for just fiscal year 2011, which starts in October, would represent more than 8 percent of the economy.
During the press conference, Orszag rebuked calls to cut spending immediately to address the deficit, saying that cutting too much spending could throw the economy back into a recession as it did in 1937.
Obama has signaled that he will focus on reducing the deficits after this year, with plans to close that gap by increasing taxes on those making more than $250,000 a year, a step that is expected to sweep in almost $700 billion over the next decade.
And the elimination of fuel subsidies is set to garner $250 billion during the same period.
His administration says $250 billion would also be saved by freezing portions of domestic spending for three years, then allowing the funds to increase in step with the rate of inflation.
War spending and veterans programs are exempt from the cuts, as are entitlement programs such as Medicare, Medicaid and Social Security.
Orszag said that these efforts – taken with cost savings from winding down the wars in Afghanistan and Iraq – could reduce the deficit by more than $2 trillion over the next decade.
The wars in Afghanistan and Iraq would get a cumulative $160 billion in 2011, which is roughly level with what they are costing this year.
The administration’s plan also relies on a strengthening economy- which is expected to raise tax revenue and switch off the automatic recession spending increases, like unemployment insurance.
Despite the broad spending freeze, the 2011 budget proposes increases in what the administration calls key drivers in the economy – $3 billion more toward education, $61 billion extra in research and development and increases in clean energy research.
In a speech Monday morning, Obama called on Congress to make sometimes painful cuts. “I’m asking Republicans and Democrats alike to take a fresh look at programs they supported in the past,” he said. “We simply cannot continue to spend as if deficits don’t have consequences.”
Minarik was asked in the interview whether Congress would be cooperative. “I believe it will be very, very difficult to achieve any significant budget savings,” he replied, explaining that Republicans are showing little effort in helping Obama to solve problems.
Congress recently passed pay-as-you-go legislation, which requires lawmakers to find a way to pay for new legislation. Medicare, Medicaid and Social Security would not be affected by this new law.
The budget comes shortly after Obama proposed tax cuts this year on small businesses in an effort to spur job growth, which would contribute $100 billion to this year’s projected deficit. The tax cuts, in conjunction with proposed spending increases, would boost this year’s deficit to $1.6 trillion – the highest since World War II.
The 2010 deficit would be about 11 percent of the economy.
Orszag said the administration is focused on ultimately bringing the ratio of the deficit to the nation’s total economic output to 3 percent – a far cry from the 10 percent seen last fiscal year, and from the predictions of the next two years.
But as the economy strengthens, the administration hopes to drive the deficit down to 5 percent of gross domestic product by 2015.
Speaking with Orszag at the press conference, Obama’s lead economic advisor, Christina Romer predicted that unemployment would fall slowly from its current 10 percent to 9.8 percent by the end of 2010, continuing down to 8.9 percent by the end of 2011, then to 7.9 percent by the end of 2012.
She said the unemployment predictions “reflect the severe toll of the recession.”
The administration famously predicted last year that unemployment would not rise above 8 percent. But with the current stance of unemployment at 10 percent, Romer faced pressure to defend the new predictions.
“We think it’s a reasonable, honest forecast,” she said, noting that the fall in employment had been surprisingly large in comparison to changes in the economy. Needless to say, Monday’s employment predictions are far more solemn than those made last year.
Acknowledging the difficulty in tackling the persistent deficit and righting the economy, Minarik commented on his appointment to the bipartisan committee to propose a solution. “The good news is I was named to it. The bad news is I was named to it,” he joked.