Swelling deficit poses key challenges to Obama reform plans

US President Barack Obama’s administration and a Congressional financial watchdog projected Tuesday swelling 10-year government budget deficits, posing key challenges to his ambitious health care reform and climate change plans.

The White House projected a whopping 9.05-trillion-dollar deficit for the 2010-2019 period, a two-trillion-dollar increase from the February estimate made a month after Obama entered office and inherited a gaping deficit from his predecessor George W. Bush.

The White House also trimmed the 2009 fiscal budget deficit projection to 1.58 trillion dollars from a previous estimate of 1.84 trillion dollars.

“Overall, it underscores the dire fiscal situation that we inherited and the need for serious steps to put our nation back on a sustainable fiscal path,” the White House’s Office of Management and Budget director Peter Orszag said.

Administration officials argued that if the Bush administration had abided by budget guidelines, the projected 10-year deficit would be five trillion dollars smaller.

The swelling budget figures are expected to fuel a fierce political debate over staggering national debt as Obama’s Republican critics step up their calls for the president to abandon his plans to remake US health care and combat climate change.

Health care reform and climate change plans, which could help ease global warming and push development of nonpolluting energy alternatives, could cost several trillion dollars, based on some estimates.

“It’s time for the administration and congressional Democrats to face the consequences of this dangerous fiscal agenda and change course,” said John Boehner, Republican minority leader of the House of Representatives.

“The alarm bells on our nation’s fiscal condition have now become a siren,” added Senate Republican leader Mitch McConnell.

But Orszag pointed out that seven months of Obama administration policies had already seen the estimated deficit for the 2009 fiscal year, which ends September 30, trimmed by 262 billion dollars to 1.58 trillion dollars.

The updated deficit estimate represents 11.2 percent of gross domestic product, down from the previous estimate of 1.84 trillion dollars, or 12.9 percent of GDP.

“We now expect that the policies put in place to repair the financial system are likely to cost taxpayers less than previously anticipated,” Orszag said.

The government has pumped hundreds of billions of dollars into the fragile financial system battered by a crisis stemming from a home mortgage meltdown that plunged the world’s largest economy into recession.

The Congressional Budget Office (CBO), the financial watchdog of Congress, meanwhile, offered a more optimistic 10-year government budget deficit projection of 7.13 trillion dollars. It assumed that all Bush administration-imposed tax cuts will expire on schedule in two years as provided under the law.

The CBO’s 2009 budget deficit projection of 1.6 trillion dollars was also nearly in line with the White House estimate.

But the CBO, a nonpartisan statutory watchdog which plays a critical support role to lawmakers by providing cost estimates, emphasized that the 2009 deficit rate “will be the highest since World War II.”

It warned that continued large deficits and the resulting increases in federal debt over time would reduce US economic growth.

In its economic forecast, the White House projected that US gross domestic product (GDP) would shrink by 2.8 percent this year as it shakes off a prolonged recession, revising its previous forecast of a 1.2 percent decline.

It expected growth to turn a positive 2.0 percent in 2010, accelerate a year later to 3.8 percent and exceed 4.0 percent per year in the 2012-2014 period.

The Obama administration and the CBO also warned of continuing job layoffs even as recovery seems imminent, expecting the unemployment rate to peak above 10.0 percent next year.

The CBO estimates unemployment would fall to around 4.8 percent only in the 2014-2019 period.

“These latest projections show that the unemployment rate won’t return to previous levels until 2014, more than six years after the collapse of the housing bubble threw the nation into recession,” said Dean Baker, co-director of The Center for Economic and Policy Research. –AFP