Q&A: Obama stimulus plan

US President Barack Obama has signed into law a slimmed-down economic stimulus plan worth about $787bn (£548bn) aimed at boosting the US economy.

The signing came after weeks of political wrangling which saw the original bill altered by Congress.

Its passage into law followed warnings from the president that the US could face an economic disaster if radical action was not taken.

What is in the stimulus plan?

The stimulus plan includes a combination of measures designed to maximise its political support, including tax cuts, additional spending on infrastructure and aid to the US states, which are having their own budget difficulties.

Senate Majority Leader Harry Reid said the deal “bridged differences” between an $820bn House version of the bill and a different $838bn version approved by the Senate.

The earlier version approved by the House of Representatives, of which one-third was made up of tax cuts, included a $500 cut in income tax for individuals.

Another big portion was money to help states close their budget gaps and avoid laying off state employees, as well as helping them pay more benefits to the less well-off.

Finally, there were additional funds to invest in infrastructure projects, such as repairing roads and bridges, improving home insulation, and repairing classrooms.

The plan agreed by Senate negotiators has more tax cuts – about 36% of the package – and a smaller amount of aid to states, a Senate aide told Reuters news agency.

A “Buy American” clause which originally sought to ensure that only US iron, steel and manufactured goods were used in projects funded by the bill has been watered down, with a promise the US will respect its international trade obligations.

However, critics at home and overseas – including ministers in Europe, Brazil and China – continue to express strong concern that the provision may encourage protectionism and sour trade relations.

Why has such a big stimulus plan been proposed?

The US economy is entering its sharpest downturn since before World War II, according to many economists.

Supporters of the measures say that without the stimulus, the downturn that began at the end of 2007 could last well into 2010. The slump has already cost three million jobs.

President Obama has made passing the stimulus package his priority, saying that millions more jobs could be lost during the recession.

As US interest rates are already approaching zero, it is clear that other policies must be considered to revive the economy.

Why was the original plan delayed?

The plan was delayed by partisan wrangling between Democrats and Republicans in Congress, and differences between views in the House of Representatives and the Senate as to what should be in the bill.

The first version of the bill was passed in the House of Representatives without receiving a single vote from the Republican side. But it was then modified in the Senate, where the Democrats needed Republican support to get it through.

The Democrats have a majority, but they fell two votes short of the 60 required to ensure the Republicans could not block the bill with a filibuster.

To gain the support of moderate Republicans, Democrats had to accept a mixture with more tax cuts and less money to help states and local governments.

And the Senate added $35bn to stimulate house purchase and $11bn to reduce the cost of buying a car.

Who supported the revised stimulus plan?

It was backed by 246 Democrats in the House of Representatives. Seven Democrats and all 176 Republicans voted against.

The package received just three Republican votes in the Senate, but that was enough to under Congress rules to stop the Republican party using blocking tactics to delay the plan, and it passed 60-38.

Will it work?

According to the independent Congressional Budget Office (CBO), the stimulus package is likely to reduce the severity of the recession, although not eliminate its impact entirely.

The CBO also says that although only a portion of the stimulus will be spent in 2009, the bulk of the money will be spent by the end of 2010, when the effects of recession are still likely to be lingering.

But much will depend on the responses of individuals and government officials.

Tax cuts will be effective only if people spend rather than save the extra income they receive.

And infrastructure projects will need to be up and running quickly to make an impact on unemployment.

How will it be paid for?

The stimulus plan will be funded by borrowing money – pushing the US budget deficit, which is already projected to rise above $1 trillion this year.

A $569bn deficit was recorded for the first four months of the fiscal year that began last October, a record for that period, the Treasury Department said.

The government says that all the measures in the stimulus plan are temporary and it is committed in the long term to bringing the budget back into balance.

But if financial markets become sceptical of that commitment, they could push up the cost of government borrowing.

And future generations will have to pay the borrowing costs of the additional debt for many years to come.