In These New Times

A new paradigm for a post-imperial world

Obama proposes $4tn cut to US federal debt

Posted by seumasach on April 17, 2011


13th April, 2011

Barack Obama has set the stage for a new and bigger budget showdown with the Republicans, proposing to cut a staggering $4 trillion (£2.46tn) from US deficits over the next 12 years in the face of America’s runaway borrowings.

Although the cut is enormous, it still falls well short of the $6.2tn the Republicans are demanding.

The battle is set to dwarf last week’s 2011 budget row that came within an hour of seeing the federal government shut down. The size of the acccumulated federal debt, more than $14tn, is one of the biggest political issues in the US, especially with the country in hock to China, which has amassed a hoard of dollars.

With the government’s 2011 budget deficit projected at $1.5tn, the growing pool of federal debt was was one of the main reasons for the rise of the Tea Party movement and contributed to the Republican victory in last November’s congressional elections.

Obama has proposed to tackle current and future deficits – and therefore the overall public debt – partly by cutting about $2tn in spending. Some of this would come from curbing defence spending and ending tax breaks introduced by George W Bush for wealthy Americans – those earning more than $250,000 a year.

In a move that will anger the Democratic base, Obama is also suggesting further cuts to come from reforms to Medicaid, which provides basic health provision for the poor, and Medicare, which provides healthcare for those over 65.

The president, who set out his proposals in a speech at George Washington University in DC, blamed Bush for the deficit. He said it has been known for decades that the baby boomers reaching retirement age would put a strain on health and social security at this time. Bill Clinton had left a balanced budget and the burgeoning deficit had been a consequence of the Bush era, Obama said.

“We increased spending dramatically for two wars and an expensive prescription drug programme, but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts: tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500bn every year over the next decade,” he said.

Obama added: “Even after our economy recovers, our government will still be on track to spend more money than it takes in throughout this decade and beyond. That means we’ll have to keep borrowing more from countries like China. And that means more of your tax dollars will go toward paying off the interest on all the loans we keep taking out. By the end of this decade, the interest we owe on our debt could rise to nearly $1tn.”

The Republicans, after meeting Obama at the White House, said they opposed ending Bush’s tax breaks. They also want big cuts in Medicaid and Medicare. “It is time to act,” said the Senate Republican leader Mitch McConnell. “We don’t believe a lack of revenue is part of the problem, so we will not be discussing raising taxes.”

Joe Biden, the vice-president, will begin regular meetings with Republican and Democratic congressional leaders next month. Obama said the aim was to reach a final agreement on a plan to reduce the deficit by the end of June.

The focal point in the next few weeks is the raising of the country’s debt limit above $14.3tn. Normally this would be a technical move that would be voted through without much bother, but it has become part of the battle over spending.

If this is not agreed by the Republicans, the country will be in default, which would be embarrassing for Obama and would have implications for economies around the world. The deadline is 16 May.

Republican leaders said that if Obama did not agree to major debt cuts, they would not vote through the rise in the debt ceiling from $14.3tn.

The Republicans, who have a majority in the House of Representatives, are scheduled to pass a bill later this week to cut $6.2tn over the next decade without raising taxes. But it has no chance of getting through the Democrat-controlled Senate. Even if it did, Obama could use his presidential veto to block it.

The battle over the deficit has consequences not only for the US as it stumbles out of recession but other world economies. Democrats warn that the spending cuts being advocated by the Republicans would send the country back into recession.

The fight last week was over the remaining six months of this year’s budget and involved only $38bn in cuts compared to the trillions at stake over the coming weeks and months.

Obama’s problems are not confined to the Republicans. Many Democrats in Congress and outside, mainly the volunteers who helped get him elected in 2008, object even to the $2tn in spending cuts, and in particular any cuts to Medicare and Medicaid.

Two left-wing groups that campaigned for him last time are threatening to withhold funds next year.

Some economists and political scientists also raise what they see as the danger of Republican cuts slowing or even reversing America’s climb out off recession. Thomas Ferguson, professor of politics at the University of Massachusetts, said there was a danger of repeating the mistakes of the Great Depression by chopping spending. “The US would surely take a rather large plunge. They will get Ireland and Greece outcomes. You will crater the US economy if you were to enact the [Republican] bill,” he said.

Where to find $4tn?

The biggest proportion of the US budget is taken up by defence spending, the country’s minimalist social security provision, and by Medicaid, which provides a basic health provision for the poor, and Medicare, which provides healthcare for those aged over 65.

Obama is proposing to cut about $2tn from spending, much of it from defence and health. He promised he would not cut health provision but would look at reducing the cost of prescription drugs and introduce incentives to encourage preventive medicine. He is also to conduct a defence review, looking at America’s military missions, capabilities and role in the changing world.

He hopes to save another $1tn by lowering interest payments on the federal debt.

The final $1tn would come from ending tax breaks for those earning more than $250,000 a year, which date back to the Bush era – a move that the Republicans will attempt to block.

• This article was amended on 14 April 2011. In the original, the heading and opening paragraph said the Obama proposal was for $4tn in spending cuts. This has been corrected, and the distinction between the national debt and annual government deficits clarified.

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