WASHINGTON – US President Barack Obama unveiled a $3.73-trillion spending blueprint for 2012 on Monday, including a raft of tax hikes and spending cuts aimed at curbing a record budget deficit.
Kicking off what is sure to be a long and brutal political battle over election-year spending, Obama’s plan bets that economic growth can help forestall savage spending cuts that could derail the recovery.
With the country facing a projected budget shortfall of $1.65 trillion this year, the proposal — which has to be combed over and approved by Congress — relies heavily on increased tax revenues to slash the deficit next few years.
Obama stressed need for the United States to “out-build and out-innovate and out-educate” competitors, saying the budget would increase investment in innovation at the same time as forcing the government to start “living within its means.”
The plan would shift billions in spending toward the high-tech and green energy sectors, while trimming unaffordable projects.
Amid public anger that Washington is spending too much, Obama said his plan would realize his promise of halving the deficit by the end of his first term in January 2013 and cut over one trillion dollars in spending in the next decade.
“The budget I’m proposing today meets that pledge and puts us on a path to pay for what we spend by the middle of the decade,” Obama said at a school in Baltimore, Maryland.
“As a start, I called for a freeze on annual domestic spending over the next five years,” he said, pointing to a package that saves around $400 billion dollars over the next decade.
But many of the savings will be phased in, with just $90 billion in spending cuts expected in 2012.
Despite the cost-cutting rhetoric, many of the short-term deficit gains would come from revenue increases, including higher taxes.
The administration forecasts that next year receipts will increase by more than 20 percent, or $453 billion compared with this year, cutting the deficit from a whopping 10.9 percent of GDP this fiscal year to seven percent in 2012 and 4.6 percent the year after.
Tax cuts for the highest earners would be allowed to expire, while those in the highest bracket would also face a 30-percent drop in allowable tax deductions.
The administration has already failed to pass similar measures and will face a tough fight to get them through a Republican-controlled House of Representatives, with its eye on 2012 presidential elections.
Companies meanwhile are expected to kick in 65 percent more in taxes next year, as their revenues bounce back from recession.
At the same time oil, gas and coal companies would lose 12 tax breaks, raising $46 billion for the government in the next decade.
But the plan is also dependent on the economy performing much better than outside experts expect.
The budget predicts the US economy will grow 3.6 percent next year — providing a massive boon in tax revenue — with unemployment sinking to 8.6 percent.
Those figures are well above the 2.7 percent growth predicted by the International Monetary Fund for 2012, and unemployment today stands at nine percent.
Any change in those projections will “significantly impact” the budget, according to Joseph LaVorgna of Deutsche Bank, with a one percent change in growth rates spelling dramatic changes for revenue projections.
At 2,448 pages and a weight of 10 pounds (4.5 kilograms), the budget contains something for most members of Congress, but plenty more that will be loathed.
Critics said the plan also failed to address much-needed cuts in the most expensive government programs — notably defense and social benefits spending.
“President Obama’s budget doubles down on the bad habits of the past four years by calling for more taxes, (and the) spending and borrowing of money that we simply do not have,” said House Republican leader Eric Cantor.
Cantor said the budget failed to heed the warnings from a recent bipartisan deficit commission, which called for steep cuts to Social Security, Medicare and Medicaid, programs which account for around half of the budget.
“Unfortunately, the president again failed to put action behind his words by neglecting to even acknowledge these tough issues,” he said.
Republicans have long argued that drastic spending cuts will help boost growth, while the Obama administration argues cuts should be carefully measured for fear of derailing the recovery.
Bringing the two sides together is likely to be a long process that takes up most of the year before the required congressional approval of the budget.
The inability of the United States to get its budget under control has sparked fears of a debt crisis and a possible default that would plunge the globe into crisis.