Era of 'Monopoly money' budgets is over, says Obama

President predicts $1.56trn deficit and asks America to 'save what we can, spend what we must and live within our means'

(ap)

Hemmed in by shrunken tax revenues and a need to spend a still fragile economy into a sustained recovery, a grim-faced President Barack Obama yesterday unveiled a new budget that forecast a record deficit of $1.56 trillion (£98trn) this year and offered little short-term prospect of rescuing the United States from its tide of red ink.

The budget proposal, which is subject to amendment by Congress, served as a cold reminder both of the sheer weight of America's budget imbalance and the depth of the political predicament it creates for Mr Obama.

The President and his economic advisers are straining to strike a balance on the one hand between looking serious about tackling the runaway national debt and doing what is necessary to give fuel to the nascent economic upswing. Beneficiaries of increased spending will include small businesses, the unemployed and, as it fights two wars, the Pentagon.

While last year was about healthcare reform and the stumbling efforts to pass it, this may be the year when America confronts its budgetary dysfunction, not least because overspending by Washington and the corrosive effects of the deficit have climbed to the top of voter concerns in a mid-term election year. It is partly the perception of a government that has grown too large and too profligate that is souring independent voters on Mr Obama and the Congress and giving grist to the burgeoning anti-tax Tea Party movement.

Mr Obama said he welcomed all suggestions on cutting spending. But striking a stern tone, he said: "It's time to hold Washington to the same standards families and businesses hold themselves. It's time to save what we can, spend what we must, and live within our means once again." And, he added, spending could not continue "as if the hard-earned tax dollars of the American people can be treated like Monopoly money."

The White House had trailed the budget announcement for days with a promise to institute a three-year spending freeze for certain areas of domestic spending. Nasa, for example, will see its efforts to put astronauts back on the moon shut down, and the document contains a scattering of other budget and programme eliminations.

To try to raise new revenues, meanwhile, Mr Obama is proposing an end to the Bush-era tax cuts for the wealthiest Americans and hopes to institute a new fee on the big banks to help pay for the losses under the government's unpopular bailout programme.

According to the White House projections, these and other measures should be enough to lower the annual deficit to roughly $700bn, about 4.2 per cent of national GDP, by late 2013. But the long-term spending priorities spelled out yesterday would add $8.5trn to the national debt by 2020, increasing debt as a proportion of GDP to 77 per cent compared to 53 per cent now.

But in the short term, the Obama administration does not recoil from new spending altogether. The budget includes a call for Congress to pass a $100bn programme immediately to boost job growth. This, officials argue, will pay off in the long term because part of the problem today can be attributed to the loss of 7 million jobs since the recession began. Joblessness means lower revenues and higher spending on social programmes. "We won't be able to bring down this deficit overnight, given that the recovery is still taking hold," Mr Obama said. "We will continue to do what it takes to create jobs. It is essential."

Lobbyists, corporations and politicians alike were all scouring the $3.83trn budget for lines that might directly affect them. In its pages, you could find a steep cut in funding for tracked vehicles for the US Army and a call for an end to crop subsidies for wealthy farmers. Oil companies stand to lose $39bn in tax breaks.

There will be sharp disappointment for the environmental lobby. Provisions in last year's budget for income of $646bn over seven years from a greenhouse gas cap-and-trade system are missing this year as the administration acknowledges that opposition to it in Congress is probably too fierce to overcome.

The proposed spending freeze, meanwhile, will not affect social programmes like Medicare, nor impact homeland security or defence spending. Mr Obama is asking Congress to approve a record $708bn in defence spending in 2011, including a 3.4 per cent increase in the Pentagon's base budget and $159bn to fund US military missions in Iraq, Afghanistan and Pakistan.

US spending: The winners and losers

Defence Obama is asking for $708bn – more than has been asked by any other American president. Some things don't change. But this is what happens when sending one soldier to Afghanistan for one year costs the taxpayer $1m.

Jobs Obama is asking Congress to pass a $100bn jobs stimulus bill immediately to help bring the jobless numbers down. As part of the same effort, Obama wants new tax cuts and other incentives for small businesses.

Education A top priority. As this White House talks about a freeze on voluntary domestic spending in the three years going forward, this budget actually increases cash for primary and secondary education by $33bn in 2011.

Tax cuts They knew it was coming. The wealthiest of Americans – those with incomes above $250,000 a year – can wave goodbye to those nice tax cuts that were introduced by George Bush. This should generate an additional $678bn over 10 years.

Banks Obama wants them to pay new fees to help pay for any losses incurred by the government's $700bn financial rescue programme. This is a populist measure that should produce about $90bn to help offset the deficit.

Space Forget the nostalgic hoopla that surrounded the Moon landings anniversary last year. This budget effectively shuts down Nasa's programme to return astronauts to the Moon and instead provides cash to encourage private space exploration.