Official: Budget projects $1.75 trillion deficit

[February 26, 2009]  WASHINGTON (AP) -- President Barack Obama is sending Congress a budget Thursday that projects the government's deficit for this year will soar to $1.75 trillion, reflecting efforts to pull the nation out of a deep recession and a severe financial crisis.

A senior administration official told The Associated Press that Obama's $3 trillion-plus spending blueprint also asks Congress to raise taxes on the wealthy in 2011 and cut Medicare costs to provide health care for the uninsured.

The president's first budget also holds out the possibility of spending $250 billion more for additional financial industry rescue efforts on top of the $700 billion that Congress has already authorized, according to this official, who spoke on condition of anonymity before the formal release of the budget.

The official said the administration felt it would be prudent to ask for additional resources to deal with the financial crisis, the most severe to hit the country in seven decades. He called the request a "placeholder" in advance of a determination by the Treasury Department of what extra resources will actually be needed.

The spending blueprint Obama is sending Congress is a 140-page outline, with the complete details scheduled to come in mid- to late April, when the new administration sends up the massive budget books that will flesh out the plan.

However, the submission of the bare budget outline was certain to set off fierce debate in Congress over Obama's spending and tax priorities. The budget document includes additional requests for the current year and Obama's proposals the 2010 budget year, which begins Oct. 1.

The president wants Congress to extend the $400 annual tax cut due to start showing up in workers' paychecks in April, and it extends the tax cuts passed in 2001 and 2003 for couples earning less than $250,000 per year. Those tax cuts were due to expire at the end of 2010.

To pay for the middle-class tax relief and the effort to increase health coverage, Obama's budget makes significant cuts on the rate of growth in other areas of health care and seeks to trim a variety of other government programs, including subsidies earned by farmers with revenue of more than $500,000 a year.

The budget would also seek savings in military weapons purchases. It would raise taxes on wealthy hedge fund managers and corporations, eliminating tax incentives U.S. companies now have to move jobs overseas, something Obama repeatedly mentioned during the presidential campaign.

Even with all the savings, the cost of the $787 billion economic stimulus bill will push the deficit for this year to $1.75 trillion, a level -- as a percentage of the economy -- not seen since World War II. The deficit is expected to remain around $1 trillion for the next two years before starting to decline to $533 billion in 2013, according to budget projections.

Obama's plan proposes achieving $634 billion in savings on projected health care spending and diverting those resources to expanding coverage for uninsured Americans. The $634 billion represents a little more than half the money that would be needed to extend health insurance to all of the 48 million Americans now uninsured.

Americans now spend a total of $2.4 trillion a year on health care.

Obama also will ask for an additional $75 billion to cover the costs of wars in Iraq and Afghanistan through September, the end of the current budget year. That would be on top of the $40 billion already appropriated by Congress, the administration official said.

The administration will also ask for $130 billion for Iraq and Afghanistan in 2010 and will budget the costs of operations in Iraq and Afghanistan at $50 billion annually over the next several years.

Obama's budget proposal would effectively raise income taxes and curb tax deductions on couples making more than $250,000 a year, beginning in 2011. By not extending former President George W. Bush's tax cuts for such wealthier filers, Obama would allow the marginal rate on household incomes above $250,000 to rise from 35 percent to 39.6 percent.

The plan also contains a contentious proposal to raise hundreds of billions of dollars by auctioning off permits to exceed carbon emissions caps, which Obama wants to impose on users of fossil fuels to address global warming.

Some of the revenues from the pollution permits would be used to extend the "Making Work Pay" tax credit of $400 for individuals and $800 for couples beyond 2010, as provided in the just-passed economic stimulus bill.

About half of what officials characterized as a $634 billion "down payment" toward health care coverage for every American would come from cuts in Medicare. That is sure to incite battles with doctors, hospitals, health insurance companies and drug manufacturers.

Some of the Medicare savings would come from scaling back payments to private insurance plans that serve older Americans, which many analysts believe to be inflated. Other proposals include charging upper-income beneficiaries a higher premium for Medicare's prescription drug coverage.

To raise the other half, Obama wants to reduce the rate by which wealthier people can cut their taxes through deductions for mortgage interest, charitable contributions, local taxes and other expenses to 28 cents on the dollar, rather than the 35 cents they can claim now. Even more money would be raised if the top rate reverts to 39.6 percent, as Obama wants.

Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, called Obama's proposal to tax the wealthy to finance health care reform a starting point. But he wants to also examine taxing some of health insurance benefits provided by employers -- an idea rejected by Obama in last year's presidential campaign.

Budget documents provided to The Associated Press show that Obama will not lay out a detailed blueprint for a health care overhaul, but a set of broad policy principles and some specific ideas for how to raise a big chunk of the money.

Obama's promise to phase out direct payments to farming operations with revenues above $500,000 a year is sure to cause concerns among rural Democrats.

Even after all those difficult choices, cutting about $2 trillion from the budget over 10 years, Obama's budget still would feature huge deficits.

The $1.75 trillion deficit projected for this year would represent 12.3 percent of the gross domestic product, double the previous post-war record of 6 percent in 1983, when Ronald Reagan was president, and the highest level since the deficit totaled 21.5 percent of GDP in 1945, at the end of World War II.

At $533 billion, the deficit in 2013 will be about 3 percent of the size of the economy, a level that administration officials said would be manageable.

[Associated Press; By MARTIN CRUTSINGER]

Associated Press writers Andrew Taylor, Ricardo Alonso-Zaldivar and Anne Gearan contributed to this report.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.