Obama's 2010 budget: deficit soars amid job spending

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President Barack Obama pledged on Monday to halve a record 2010 budget deficit by the end of his first term in office, but made tackling double-digit unemployment his immediate priority with a spending plan that risked public ire and a rough battle in Congress.

Criticized by Republicans for raising taxes on wealthy Americans, Obama is under pressure to convince investors and vital creditors like China that he has a credible plan to control the U.S. deficit and debt over time.

We won't be able to bring down this deficit overnight, given that the recovery is still taking hold, Obama said after laying out $3.8 trillion in spending plans for the fiscal year to September 30, 2011.

We will continue, for example, to do what it takes to create jobs. That is reflected in my budget. It is essential, he said in a televised statement from the White House.

Obama's blueprint now goes to a Congress deeply split on how to handle the twin woes of a massive deficit and high unemployment amid a still fragile emergence from recession.

Lawmakers girding for the annual budget battle will be in no mood to anger voters ahead of congressional elections in November, and could reshape it extensively during negotiations that may stretch into the year.

The budget forecast a $1.56 trillion deficit in 2010, or 10.6 percent of gross domestic product (GDP), up from a 9.9 percent share of GDP in 2009.

But the shortfall was forecast to shrink to 8.3 percent of GDP in 2011. By the time his term ends in January 2013, it would have halved from the level Obama inherited on taking office last year, keeping a key pledge. That supposes Obama gets Congress to agree to spending cuts and that the economy rebounds strongly enough to sharply lift tax revenues.

Even if all goes to plan, the budget still forecasts U.S. public debt rising above 71 percent of GDP by 2013, up from 53 percent in 2009, and almost 80 percent by 2020 -- levels that could spook investors.

Financial markets largely ignored the budget numbers, which had been extensively previewed, but analysts were not assured.

We're playing with fire. Foreign countries are noticing our governance failures, said Bill Galston, a senior fellow at the Brookings Institution, a Washington think-tank.

The dollar's standing as the world's reserve currency and our economy's standing as the world's leader are both in jeopardy, he said.

The deficit's rise in 2010 was partly due to the $787 billion stimulus package Obama pushed through Congress early last year to fight the recession.

Obama, a Democrat, said he had inherited the financial mess from his Republican predecessor President George W. Bush, but did not pretend that the budget would please many people.

Budget day is like tax day -- it's never fun. No matter what, it's big numbers, he said.

REPUBLICAN IRE

Republicans seized on the grim fiscal forecast to criticize Obama's handling of the economy.

Senator Judd Gregg, the top Republican on the Senate Budget Committee, warned the country was sinking into a quagmire of debt and said Obama's stimulus plan had failed to create jobs.

These circumstances call for a bold, game-changing budget that will turn things around, put in place a plan to restrain spending, reduce the debt and tackle the big entitlement programs that are growing out-of-control, he said. Instead, the president has sent us more of the same.

The budget outlined some expected savings from the reform of Medicare and Medicaid entitlement programs that care for elderly and poor Americans. But his health reforms have stalled in Congress and Obama did not dwell on healthcare in detail.

Republicans complain the projected improvements in the country's fiscal position come mainly through higher taxes and stronger growth, while spending emerges largely unscathed.

Obama plans to allow tax cuts to expire on affluent American families who make more than $250,000 a year, which is expected to raise $678 billion over the next decade.

He will extract $90 billion from big banks with a fee to recoup taxpayer losses for bailing out the industry during the financial crisis during 2008. Scrapping subsidies to oil, coal and natural gas companies will raise a further $40 billion.

Obama also plans to save $250 billion between 2011 and 2020 by curbing 120 federal projects, including $23 billion next year. These cuts included the country's powerfully symbolic space mission to return to the moon, but the White House says it will also invest more in education and research.

Polls show voters are worried by the weak condition of U.S. finances, and Obama plans to create a bipartisan fiscal commission to figure out options on taxes and spending.

GROWTH FORECASTS

Much of the improvement in the fiscal picture is driven by underlying forecasts in the budget for solid economic growth -- which will not necessarily be shared by all economists.

The economy is projected to expand by 2.7 percent in 2010, but then pull at an above-average 3.8 percent in 2011 and rise above 4 percent for the following 3 years.

The budget also assumes unemployment will remain high, edging to 8.2 percent in 2012 from 10 percent this year, while inflation stays mild and interest rates rise only slightly.

Discontent over the jobless rate translated into a slap for Obama's Democrats in an election last month for the U.S. Senate in Massachusetts, costing the party a crucial Senate seat and foreshadowing potentially big losses in the November congressional elections.

Unemployment is a key concern for voters who will elect all 435 members in the House of Representatives and more than a third of the 100 Senate members in November.

To boost jobs, 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.

Economists say withdrawing policies aimed at boosting growth too soon helped prolong the Great Depression in the 1930s, a mistake Obama is determined to avoid repeating.

Democrats control both chambers in Congress. But with Republicans united in opposition to Obama's agenda, he still faces a struggle pulling together Democrats -- who badly need to show voters they are taking steps on jobs, but face a voter backlash over aggressive spending to boost the economy.

Reflecting the challenge Obama faced pushing through his domestic agenda in his first year in office, the budget dropped $646 billion in revenues from a cap-and-trade system to curb greenhouse gases -- signaling pessimism Congress will pass a bill with this provision.

(Additional reporting by Caren Bohan, editing by Frances Kerry)

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