Stephen Foley: Audacious spending plan leaves President on a fiscal tightrope

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If he hadn't already put one book out with the title, the budget plan published by Barack Obama yesterday should have been called The Audacity of Hope.

It has taken a heroic set of assumptions about the sustainability and strength of the US economic recovery even to reach predictions for deficit reduction that look as modest as this. One slip by the economy, then this budget – and perhaps this presidency – will be off the rails.

President Obama is already having to fudge the promises he made to halve the deficit he inherited by 2013, and the picture beyond that is grim, too.

While Obama talked of tough choices and partial budget freezes, the most significant contributor to the falling deficit he envisions from 2011 is the economic recovery. With more business activity and more jobs, the government can expect more tax revenues and will have to spend less on unemployment benefits.

From 11 per cent of GDP now, the annual budget deficit is projected to fall to about 4 per cent by 2013. Without the spending freeze, the projection would still have been 5 per cent, such is the power of economic recovery to lift government receipts. The trouble is that the White House projection is based on a rosy view of the economy.

Although the US economy is growing again, it remains plagued by unemployment and a lack of business confidence. Add to that some real questions about what happens to the US housing market when tax credits for first-time buyers expire in the spring, and there is still no certainty that the recovery can be sustained.

But the White House doesn't just dismiss the prospect of a double-dip recession – in which case all bets would be off. It also dismisses the likelihood of below-par economic activity for a long time to come. With the national debt weighing on government spending and the baby boomer generation retiring, most economists predict a pretty miserable-feeling decade – not the numbers which are in the fine print of the Obama budget, and which show growth often above the long-term trend.

Even the ambition to agree structural changes to social security and government-run health insurance programmes would not bring down the deficit to the 3 per cent of GDP that is typically seen as healthy.

So here is the dilemma. If it looks as if the US government cannot afford more spending, it cannot afford not to spend. Pulling back on plans to stimulate the economy with more government programmes and tax cuts only makes those audacious economic forecasts harder to achieve.

It was clear on Inauguration Day that the new President would be walking a tightrope between the need to boost spending to keep the economy moving and the need to keep US government finances from spiralling out of control. The new budget shows that tightrope getting thinner, and Mr Obama wobbling.

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