Obama budget calls for targeted cuts

President Obama's 2012 budget, out this morning, calls for $1.1 trillion in deficit reduction over the next 10 years, with roughly two-thirds drawn from spending cuts and another third from revenue increases.

Under the White House plan, the deficit would peak this year at $1.6 trillion, or 10.9 percent of GDP -- slightly higher than recent congressional projections. The deficit would decline to $1.1 trillion in 2012, or 7 percent of GDP, and stabilize at about 3 percent of GDP by 2015. But then it would start to creep back up in 2021, as retiring baby-boomers drive up outlays for Medicare and Social Security.

White House officials say they are still on track to to meet the president's target of halving the deficit that he faced upon taking office. But they admit that last year's goal of reaching a "primary" balance -- matching revenues to spending, except for interest payments on the debt -- will be postponed from 2015 to 2017.

The $3.7 trillion budget blueprint freezes domestic discretionary spending over five years and institutes an inflation-adjusted freeze on defense spending for the same period.

In a notable concession to fiscal honesty, the budget also lays out a plan for paying some big costs that Washington has glossed over for years.

It proposes to pay for the annual "doc fix" -- Congress's avoidance of Medicare's sustainable growth rate -- with $62 billion in health care savings. To patch the alternative minimum tax for three years, which would hit millions of middle-class income earners if Congress doesn't act, Obama's plan would would reduce the value of tax deductions for high-income Americans back to Reagan-era levels.

Although the budget includes 200 terminations, reductions, and savings, few of those cuts would reduce total spending because most would be plowed back into targeted investments in education, research and development, and infrastructure. The plan maintains an increase in the maximum size of the Pell Grant by cutting $100 billion from other expansions in the program, and it pays for a national wireless broadband network with revenues from auctioning additional segments of the radio spectrum.

The budget does not contain a specific program to address long-term entitlement reform, though it does build on the administration's health care cost controls. It also endorses a deficit-neutral reform of the corporate tax code, and it lays out principles for a Social Security overhaul.

Whether it ends up defining the fiscal debate or not, the president's budget at least stands as an answer to House Republicans' clamoring for spending cuts.

"The debate in Washington is not whether to cut or to spend," a senior administration official said last night. "We both agree we have to cut. The question is how we cut and what we cut."

The White House will argue that cuts must be targeted because sustainable budgets require economic growth produced by investments in education, infrastructure, and innovation. It will also argue that deficit reduction should include both defense spending -- which is subject to a real freeze for the next five years -- and tax expenditures. Both of those are areas that Republicans are reluctant to target.

While conceding the need for immediate steps toward deficit reduction, the administration is challenging Republicans to fund a series of targeted investments that Democrats argue are necessary for future economic growth.

"It's not enough just to cut,'' said one administration official. "We also have to invest in the future.... In order to invest, we have to find savings in other places. It's a budget that makes very hard choices."

One example is the Pell Grants, a higher ed subsidy Obama made a key part of his economic competitiveness agenda. In order to preserve the maximum size of the grant, recently increased to $5,550, the administration found $100 billion in savings by cutting a program that funded summer classes and reducing another that aids graduate students.

What consideration is given to ideas about long-term deficit reduction comes from an endorsement of corporate tax reform that "does not add a dime to the deficit" -- intended as a pilot program for bipartisan cooperation on fiscal issues -- a set of framing principles for Social Security reform, and several items from the president's fiscal commission, including a federal employee pay freeze and a proposal for medical malpractice reform.

Though Obama's plan does call for significant cuts and some tax increases to narrow future deficits, at most it would put a brake on the soaring rise of government debt. In 2007, just before the full force of the financial crisis arrived, the government's publicly held debt totaled about $5 trillion, or 36 percent of GDP. Today, four years later, that debt has doubled to $10 trillion, or about 68 percent of GDP. Under the White House plan, it would continue to climb in dollar terms but remain essentially stable as a share of GDP through 2021.

This is the administration's first budget facing a divided government, and it only represents the opening offer in what will be a contentious negotiation around the 2012 budget. House Republicans are expected to offer their own budget in April with a greater focus on immediate austerity. Meanwhile, key senators are building legislation around the final report of the president's fiscal commission.

The budget is focused mainly on the future, with top priority given to deficit reduction and long-term investments. Little is said about near-term job creation, even though unemployment is forecast to remain at 9 percent when the next fiscal year begins.

The argument will play out against the background of two related debates. Congress and the president need to agree on spending levels for the remainder of the current fiscal year; a temporary spending measure expires March 4, and if it is not extended, a government shutdown will result. Another vote in Congress, this one to increase the government's borrowing limit, which the Treasury Department expects to reach by the end of May, will also provide a venue for spending disagreements.