Obama budget: White House defends $1.267 trillion federal deficit

Many finance experts say that Obama's basic strategy on the federal deficit is the right one for a fragile economy, but the effort carries economic risks.

President Obama's budget hinges on a time-honored strategy: Spend now and plan to get Washington's fiscal house in order later.

And the "later" part, so far, looks like much later.

The federal deficit would be about $1.267 trillion in 2011 under the budget that Mr. Obama submitted to Congress Monday. By 2020, the White House forecasts a smaller deficit, but one that still exceeds $1 trillion.

For the Obama administration, those big deficits are part of a carefully crafted strategy: focusing first on boosting the economy and jobs, then pivoting gradually toward fiscal discipline.

While Washington has long been enamored of deficit spending in good times as well as bad, many finance experts say that Obama's basic strategy is the right one for a nation still mired near the trough of a deep recession.

But the effort carries economic risks. Investors could demand higher interest rates on Treasury debt because of worries that Washington will never act to bring deficits down. The recent debt crisis in Greece is a reminder of the kind of troubles that can arise – and large nations like the United States are not necessarily immune.

The size of federal deficits could also create political challenges for Obama, if Republicans are able to cast themselves as a party of fiscal restraint. Recent polls find that voters are very concerned about big federal deficits, just as they are about jobs.

Against this backdrop, Obama and his aides on Monday sought to make a two-part case for Obama's plan. Their first point is that a sharp reduction in deficits now would be a bad policy. The second is that the president is making serious efforts at spending restraint – even with the context of high deficits – and is committed to fixing America's fiscal problems for the long term.

"We’re trying to find this balanced approach in which we have a smooth glide path" toward fiscal sustainability, Budget Director Peter Orszag said Monday in a media briefing. "We don’t want to act too rapidly to bring down the deficit."

Obama's plans already make headway on taming deficits, he said. But finishing the job “requires a bipartisan process, and that’s what we’re pursuing," he added.

Treasury Secretary Timothy Geithner has outlined the goal of bringing annual budget deficits down to 3 percent of US gross domestic product. By hitting that target, the national debt would remain constant as long as GDP grows by 3 percent.

But the new White House budget doesn't tame deficits down to 3 percent of GDP in any year this decade. And the numbers count on the economy growing a bit faster than 3 percent a year.

That’s an optimistic target, some economists outside Washington say. The investment firm Goldman Sachs, for example, recently predicted that real GDP would grow at a disappointing 2.2 percent rate in the US this decade.

If the White House forecasts are correct, then a $1 trillion deficit in 2020 would equal 4.2 percent of that year's GDP – about half the size of Obama's planned deficit next year, as a share of GDP.

Obama's budget math is a testament to the difficult challenge that would face any president now.

A look ahead indicates that the national debt is fast approaching an amount equal to one year's GDP – a trend that could put America's AAA credit rating at risk in coming years. It will be hard, economists say, to set a sustainable fiscal course without some combination of more tax hikes and deeper spending cuts.

So far, Obama has drawn a firm line that households with incomes below $250,000 will not see their taxes go up.

But for now, another problem looms equally large – what Mr. Orszag calls the "jobs deficit" created by recession. In 1937, he noted, the US relapsed into the Depression when Franklin Roosevelt took steps to close federal deficits before the economy had found its footing.

Obama has proposed a jobs bill including several tax breaks designed to spur new hiring and consumer spending.

Republicans say that the deficit spending is failing to create jobs and that Obama's move to freeze a portion of federal spending doesn't go far enough toward restoring discipline.

"President Obama is submitting another budget that spends too much, taxes too much, and borrows too much,” House minority leader John Boehner (R) of Ohio said in a statement. He touted a Republican deficit-reduction plan prepared by Rep. Paul Ryan of Wisconsin.

Obama is working to set up a bipartisan commission to tackle the fiscal gap. But it will probably require urgent signals from financial markets, some budget experts say, before Congress will be ready to deal in a bipartisan way on the issue.

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