Obama Plans to Slash U.S. Budget Deficit by 2013 (Update1)
By Hans Nichols and Nadine Elsibai - February 22, 2009 14:52 EST
Feb. 22 (Bloomberg) -- President Barack Obama plans to increase taxes on the wealthy and cut spending for the war in Iraq as part of a plan to slash the U.S. budget deficit to $533 billion by the end of his first term, according to an administration official.
Obama wants to reduce the deficit because he’s concerned that over time, federal borrowing will make it harder for the economy to grow and create jobs, said the official, speaking on the condition of anonymity.
The deficit Obama inherited on taking office last month was $1.3 trillion. The administration is scheduled to hold a so-called fiscal-responsibility summit at the White House tomorrow, with about 130 people invited, including about 50 members of the House and Senate from both parties. An overview of Obama’s budget proposal for the 2010 fiscal year, which begins Oct. 1, will be released Feb. 26.
“We have been on an incredible spending spree,” Senate Minority Leader Mitch McConnell said today on CNN. “So I think it’s timely that the president’s having a meeting at the White House tomorrow to talk about the deficit because we’re spending money at a very, very rapid pace, far beyond anything in history.”
Most of the savings will be realized from increased revenue from Americans making more than $250,000 a year and winding down the war in Iraq, said the official. The New York Times said yesterday Obama will propose letting President George W. Bush’s tax cuts for the wealthy lapse in 2010.
Barbour Objections
“I don’t think there’s an economist in the United States that thinks when you’re trying to get out of a recession and to create jobs, you ought to raise taxes,” Mississippi Governor Haley Barbour, a Republican, said on CNN’s “State of the Union” program today.
Minnesota Governor Tim Pawlenty, a Republican, said investors won’t respond well to an Obama administration plan for higher taxes. “Wait ‘til you see the markets’ reaction to what he unveils later this week,” he said.
Pennsylvania’s Democratic governor, Ed Rendell, appearing on “Fox News Sunday,” disagreed. The idea that “raising taxes on the richest people” will harm the economy is “rubbish and it ignores history,” he said.
‘Same Arguments’
“We heard these same arguments when Bill Clinton raised taxes on the top 2 percent of the richest people in America to get rid of the deficit,” Rendell said. “He got rid of the deficit. And guess what happened? We produced 24 million new jobs. We had the eight years that were the most successful in the second half economically of the 20th century.”
To increase revenue, Obama will also propose taxing the investment income of hedge-fund and private-equity partners at ordinary tax rates, which are now as high as 35 percent and may rise to 39.6 percent under the administration’s plan, the Times reported yesterday. They are currently taxed at the capital-gains rate of as much as 15 percent.
Obama promised during the campaign that he would slash federal programs that weren’t working. “The president has said he can’t kick the can down the road anymore,” Kenneth Baer, spokesman for the White House budget office, said last week.
The $1.3 trillion deficit Obama inherited equals 9.2 percent of gross domestic product, said the administration official. The administration’s budget proposal cuts the deficit to 3 percent of GDP by 2013, at the end of Obama’s first term.
Workers’ Paychecks
Obama yesterday talked about the importance of reining in the ballooning federal deficit in his weekly address. He said the Treasury Department will begin ordering employers today to cut taxes taken from workers’ paychecks as part of his effort to pull the economy out of a recession.
The president said a “typical” family will start getting at least an extra $65 a month by April 1 as a result of the $787 billion stimulus package he signed into law this week. He said the measure is only a “first step.” The president has also pledged $275 billion to help struggling homeowners avoid foreclosure and plans to announce measures to stabilize banks. Companies from General Motors Corp. to Alcoa Inc. are slashing jobs and cutting production as the recession threatens to become the worst slump in the postwar era.
Falling Home Sales
Government reports this week are likely to show sales of new homes plunged to a record low in January while durable goods orders dropped for a sixth month, economists said.
A Feb. 26 Commerce Department report will show new-home sales fell to 324,000 on an annual basis, according to the median estimate of economists surveyed by Bloomberg News. The same day, the department may report demand for goods meant to last several years dropped 2.5 percent.
A surge in foreclosures and plummeting demand for homes has depressed prices, sending the S&P/Case-Shiller 20-city home price index down 18.3 percent in December from a year earlier, according to a separate Bloomberg survey. Meanwhile, shrinking household worth pushed auto sales in January to the lowest level in more than 26 years, and factories are scaling back production as demand from consumers and businesses erodes.
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