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Title: Obama Budget Has Contingency for More Aid to Banks (Update1) [Chimperor Part Deux]
Source:
Bloomberg
URL Source: http://www.bloomberg.com/apps/news? ... shingtonstory&sid=aY8vuevw1NKs
Published: Feb 26, 2009
Author: Roger Runningen and Brian Faler
Post Date: 2009-02-26 19:11:24 by Rotara
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Feb. 26 (Bloomberg) -- President Barack Obama’s first budget request includes a contingency for as much as $750 billion in new aid to the financial industry this year while laying plans for a health-care system overhaul and higher taxes on the wealthy. The spending blueprint, sent to Congress today, forecasts record outlays for the current fiscal year of $3.94 trillion, up 32 percent from a year ago. That would yield a record deficit of $1.75 trillion in the year ending Sept. 30, equal to about 12 percent of the nation’s gross domestic product, the highest since World War II. The Obama administration plans to spend $3.55 trillion in fiscal 2010, beginning Oct. 1, with the deficit narrowing to $1.17 trillion. The president has promised to cut the shortfall in half by the end of his first term. “While we must add to our deficits in the short term to provide immediate relief to families and get our economy moving, it is only by restoring fiscal discipline over the long run that we can produce sustained growth and shared prosperity,” Obama said today before the budget was released. Higher Taxes The budget proposes to raise taxes on couples earning more than $250,000 a year, generating $636 billion over the next decade. To do so, Obama proposes raising the top two marginal income tax rates to 39.6 percent and 36 percent, limiting itemized tax deductions and increasing taxes on capital gains to 20 percent from the current 15 percent. The plan would also raise taxes on many Wall Street financiers, pare subsidies to insurance companies participating in the government’s Medicare health-care system by $170 billion, and trim spending on some defense programs. Obama, in office about five weeks, will release a more detailed budget in April. He called the outline “an honest accounting of where we are and where we intend to go.” On the economy, the administration forecasts the gross domestic product, the value of all goods and services, will contract 1.2 percent for the entire year, reflecting the deepening recession, and rebound to an average growth rate of 3.2 percent in 2010. Outside Forecasts The 2010 forecast is more optimistic than the 1.5 percent growth rate estimated by the nonpartisan Congressional Budget Office in January or the February Blue Chip consensus for an increase of 2.1 percent. The U.S. unemployment rate likely will average 8.1 percent this year, declining to 7.9 percent in 2010, suggesting a slow rate of jobless people returning to work, according to the administration. Inflation will be 0.6 percent this year, the budget office said, and increase to 1.6 percent next year. The additional bailout funds for financial institutions this year were inserted into the budget as a “placeholder,” administration officials said. White House budget director Peter Orszag said “we hope” the extra rescue money won’t be needed and there is no plan “at this point” to formally request the money from Congress. That will depend on the outcome of a Treasury Department review on the health of banks. Rescue Funding The aid appears in a line item “for potential additional financial stabilization efforts,” according to the budget overview. The budget office calculated a $250 billion net cost to taxpayers this year, because it anticipates it would eventually recoup some, though not all, of the money expended to help financial companies. The funds would come on top of the $700 billion rescue package approved last October by Congress. The White House budgets no money for fiscal 2010 and beyond for such aid. For health care, the Obama administration is asking for a “down payment” of about $635 billion to begin overhauling the nation’s health-care system, which the president has said is critical to expanding health-insurance coverage and getting the government’s fiscal house in order. The fund would be financed in part by the limits on tax deductions for those earning more than $250,000 a year and by requiring insurance companies participating in the Medicare Advantage program to enter into competitive bidding. Fiscal Gap “Health care is perhaps the most important driving force in our long-term fiscal gap,” Orszag said in a briefing. The budget proposes to raise taxes on venture capitalists, executives of private equity firms and other investment partnerships by $24 billion by eliminating the so-called carried interest tax loophole. The provision currently allows investment managers to pay 15 percent tax rates on their compensation rather than the usual income tax rates. The spending plan also would raise $210 billion by cracking down on offshore tax havens and another $5 billion by clamping down on business transactions that are solely designed to reduce companies’ tax bills. The plan would save $882 million by eliminating the Advance Earned Income Tax Credit, a tax break for low-income earners that government officials have said is poorly administered. The spending plan assumes the government would begin taking in at least $75 billion in 2012 from a cap-and-trade system that requires companies to buy credits if they exceed greenhouse-gas limits. That money would be used to invest in clean-energy technology and also help offset higher energy costs for lower-and middle-income Americans. Defense Spending The White House asked Congress for a 4 percent increase in the Pentagon’s budget to $534 billion. That includes a 2.9 percent pay raise for troops and a boost in permanent forces of the Army and Marine Corps to 547,400 and 202,000, respectively. The growth “is two to three years ahead of schedule,” partly because a poor economy is strengthening recruitment numbers. For the wars in Iraq and Afghanistan, the administration is requesting an additional $75.5 billion for the remainder of this year, bringing the total annual spending on the conflicts to more than $140 billion. The budget assumes those costs will decline to $130 billion in 2010 and $50 billion in subsequent years. Obama plans to trim spending on weapons systems and rein in programs that grow in size and cost during development. Agriculture subsidies also are targeted for reductions, with the administration pushing to phase out payments to farmers earning more than $500,000 annually. Orszag said the administration is also proposing to cut federal subsidies to student loan providers by $48 billion. While the federal government has taken over Fannie Mae and Freddie Mac, the Obama administration opted to exclude most of the costs of running the mortgage financiers in its budget plan. The blueprint includes the money the Treasury Department has injected into the companies so far, the official said. To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net ; Brian Faler in Washington at Last Updated: February 26, 2009 12:06 EST
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