Obama aims to cut deficit in half by ’13

Call it Fashion Week for budget wonks. In a city known more for sensible shoes than stylish stilettos, Washington is entering a week like no other.

The action begins Monday, with a White House “fiscal responsibility summit” aimed at focusing attention on the exploding budget deficit and looming insolvency of entitlement programs. On Tuesday night, President Obama delivers a State-of-the-Union-like speech to a joint session of Congress.

On Thursday, Mr. Obama releases his first budget, or least the outlines of one. The week ends in Philadelphia, with the first official meeting of Vice President Joe Biden’s Middle Class Task Force.

Taken as a whole, the week is shaping up to be equal parts substance and public relations. On Monday, Obama is expected to announce that he plans to cut the budget deficit in half by the end of his term. The White House projects that the inherited deficit of $1.3 trillion will be reduced to $533 billion by 2013, as the US withdraws troops from Iraq and raises taxes on business and the wealthy, according to published reports.

Much has been made of former President Bill Clinton’s suggestion that Obama speak a bit more optimistically about the economy to raise consumer confidence. But the president is walking a fine line, as economic indicators grow increasingly bleak.

“In terms of tone, he has to strike a balance,” says political analyst Stuart Rothenberg. “He can’t say we’ve turned things around, things are going to get better, because he doesn’t know if that’s the case.”

If Obama sounds too upbeat, he will be quickly seen as out of touch, Mr. Rothenberg adds. “But I think Clinton’s probably right: There’s a danger of talking down the economy,” he says. “Since psychology is such a critical part of the economy and our ability to get out of the current spiral, he has to address that.”

By starting the week with a three-hour summit on “fiscal responsibility,” Obama signals that longer-term fiscal problems must be considered in conjunction with the immediate economic crisis. Discussions will touch Social Security, healthcare, tax reform, and the budget process. The 130 invitees include lawmakers, scholars, and leaders of advocacy groups.

On the face of it, talking about reducing the deficit – which entails budget cuts, tax increases, and politically risky changes to entitlements – may seem to contradict the spending increases and tax cuts just put in place in Obama’s $787 billion stimulus plan.

“It does sound like stepping on the gas and on the brake at the same time,” says Robert Bixby, executive director of the Concord Coalition, which advocates fiscal discipline. “In fact, I think it’s complementary.”

Over the next several years, he says, the nation will be spending and borrowing vast sums of money, and by focusing concurrently on how to bring back balance, it sends a signal to both the political and financial communities that there’s an “end game, that there’s an exit strategy to this massive borrowing.”

This signal is also important for foreign lenders who are providing most of the capital for US deficit spending. “They will need to see at some point that there’s a viability plan, just like we demand from the auto companies,” says Mr. Bixby.

Monday’s summit is not intended to reach conclusions or launch initiatives, but to frame the debate. A bipartisan group of budget experts recommended Thursday that the summit be followed by creation of a bipartisan, independent commission that would craft a solution to America’s long-term fiscal problems. Based on the model of military base-closing commissions, the group would present recommendations to Congress for an up-or-down vote.

In terms of substance, the week’s highlight will come Thursday, with the unveiling of Obama’s first budget. Though it will be more an outline than a detailed blueprint, as is customary for a new president, enough will be there to provide a sense of the Obama administration’s direction. The full budget will be ready in April.

“One of the things that the president really has to do with the budget is to send a clear, credible signal that there is a long-term plan to save the economy and keep the federal budget from going over a cliff,” says William Galston, who served as domestic policy adviser in the Clinton White House.

Already, the Obama administration has signaled an end to what it calls the budgetary “gimmicks” of the Bush administration, such as keeping Iraq and Afghan war and disaster spending off budget.

No one doubts the numbers will be ugly. A paper released Thursday by two economists, Alan Auerbach of the University of California, Berkeley, and William Gale of the Brookings Institution, projects that in 2009, the federal deficit will be larger as a share of the economy than at any time since World War II.

Even under optimistic assumptions, they write, “the deficit is projected to average at least $1 trillion per year for the 10 years after 2009.”

It is within this gloomy context that Obama will address Congress, the nation, and the world Tuesday evening. In his weekly Internet address Saturday, the president provided a glimpse of what he is expected to say on Tuesday. He reviewed the elements of the just-signed stimulus package and the ways in which its effects will be felt. He also sought to demonstrate the interconnectedness of the economic crisis – how the banking and credit crisis links to housing and jobs.

And he stressed the importance of fiscal discipline, saying the government must do “all we can to get exploding deficits under control as our economy begins to recover.”

“In short, we cannot successfully address any of our problems without addressing them all,” he said.