Obama to unveil plan for halving budget shortfall he inherited

By Krishna Guha in Washington Published: February 23 2009 02:00 Last updated: February 23 2009 02:00 Barack Obama will this week set the goal of halving the budget deficit he inherited by the end of his first term, while pushing ahead aggressively on healthcare reform, climate change and education. His first budget, to be released on Thursday, will show the deficit's falling to $533bn by fiscal year 2013, against an inherited deficit that aides estimate at $1,300bn. The deficit projected for this year will be higher than $1,300bn due to additional spending on the fiscal stimulus and other crisis-fighting measures. Revenue from the sale of emissions permits under a cap-and-trade system will help pay for the deficit reduction, along with cuts in spending on the war in Iraq, higher taxes on wealthy individuals and businesses. "The president is committed not only to addressing healthcare costs - the key to our long-term fiscal future - but also to reducing our medium-term deficits to a sustainable level without resorting to the budget gimmicks that have been used too often in the past," said Peter Orszag, director of the White House budget office. The Obama budget will allow the Bush tax cuts for those earning more than $250,000 to expire after 2010. The top marginal income tax rate will rise to 39.6 per cent. The top capital gains tax rate will be set at 20 per cent. Hedge fund and private equity executives will be taxed on "carried interest" - their share of profits on investments - at the higher income tax rate rather than the lower capital gains tax rate as at present. The budget blueprint will be followed by a final and more detailed budget by early April. It will make a downpayment on structural reform in health, energy and the environment by creating pools of money set aside for these purposes. A new approach to projecting future deficits will increase the cumulative deficit forecast over 10 years by $3,000bn. Some analysts think that the deficit projected for this year could approach $2,000bn. But the number is likely to be closer to $1,500bn, in part because bank recapitalisation funds will now be scored as subsidy cost rather than cash outgoings. However, the senior administration official said that Mr Obama recognised that the budget was "only a start" and wanted to work with both parties in Congress to address the nation's "long-run fiscal challenges" starting with a bipartisan fiscal summit today.