President Barack Obama today projected the US budget deficit would soar to a fresh record in 2010, challenging his push for fiscal responsibility while driving to defeat double-digit unemployment.
He warned today the US must tackle its mountain of debt to ensure sustainable economic growth in the long term and placed the blame for the high deficit, again, on his predecessor.
In introductory remarks to the White House's fiscal 2011 budget, Mr Obama said the country was $12 trillion deeper in debt compared to the beginning of the decade largely because of the recession and tax cuts for the wealthy ushered in by former president George W. Bush.
"In the long term, we cannot have sustainable and durable economic growth without getting our fiscal house in order," Mr Obama wrote.
Dubbed an old-style liberal tax-and-spender by his Republican opponents, Mr Obama is under pressure to convince investors and big creditors like China that he has a credible plan to control the country's deficit and debt over time.
While maintaining policies this year aimed at protecting a still-fragile economic recovery, in common with other major industrial nations, Mr Obama will save money by curbing 120 federal projects, including a powerfully symbolic mission to return to the moon, but invest more in education and research.
Initial market reaction was muted and analysts were surveying the numbers with a healthy dose of skepticism.
Polls show voters are worried by the weak condition of US finances, and Mr Obama plans to create a bipartisan fiscal commission to figure out options on taxes and spending.
Mr Obama's budget for the fiscal year to September 30th, 2011, which is subject to change by the US Congress, forecast a deficit of $1.56 trillion in 2010, equal to 10.6 per cent of the economy measured by gross domestic product (GDP).
This rise was partly due to spending associated with a package of emergency stimulus measures Mr Obama signed last year.
The increase in the deficit compared with a $1.41 trillion shortfall in 2009 that amounted to 9.9 per cent of GDP.
But this funding gap was forecast to dip to $1.27 trillion in 2011, or 8.3 per cent of GDP, and fall to roughly half that as a share of the economy in the final year of Obama's term in 2012, meeting a key pledge.
The budget incorporates healthcare legislation before lawmakers. But an administration official said $646 billion in projected revenue from a controversial cap-and-trade climate change bill had been dropped from the budget, implying the White House is doubtful the measures will pass Congress.
"To continue job creation and to continue economic growth over time, it is important to bring those out-year deficits down," White House budget chief Peter Orszag told reporters.
US economic growth jumped by 5.7 per cent at an annual pace in the fourth quarter, but this has yet to translate into greater hiring, and unemployment of 10 per cent is near a 26-year high.
Discontent over the jobless rate translated into political defeat for Mr Obama's Democrats in a recent election for the US Senate in Massachusetts, foreshadowing significant losses for the party in midterm congressional elections in November.
To boost jobs, Mr Obama is setting aside $100 billion in 2010 in tax credits aimed at small businesses as well as investments in clean energy and infrastructure, before starting to tighten the country's fiscal belt the following year.
"We're trying to kind of accomplish a soft landing in terms of our fiscal trajectory to avoid the risk of 1937 where we do excessive deficit reduction too quickly," Mr Orszag said ahead of the budget's formal release.
Economists say a premature withdrawal of policies aimed at boosting growth helped prolong the Great Depression in the 1930s and Mr Obama is determined to avoid repeating that mistake. But he must also ensure that investors don't lose confidence in the US ability to put its fiscal house in order.
As a result, the budget outlines measures to cut over $1 trillion from the deficit over the next decade, and almost twice this amount once the declining cost of wars in Iraq and Afghanistan are taken into account, Mr Orszag said.
Mr Obama previewed some of these steps in his State of the Union address last week, including letting tax cuts lapse for affluent Americans, a fee on big banks to recoup losses on a taxpayer bailout during the 2008 financial crisis, and a three-year freeze on domestic spending outside national security.
The White House says that allowing taxes to rise on families making above $250,000 a year will raise an estimated $678 billion over 10 years; the bank fee is projected to recoup $90 billion in that time; while the domestic spending freeze will trim $250 billion from the deficit.
Mr Obama expects to save $20 billion in 2011 from the spending clampdown by ending or paring back 120 programmes, including the NASA space agency's project to return to the moon. However, these proposals will need congressional backing and that may be difficult to secure.
Even if all of these measures are adopted, the deficit will remain above the goal of 3 per cent of GDP that Mr Obama seeks, and he plans to create a bipartisan fiscal commission to review spending cuts and tax increases to achieve this target.