Budget Forecasts Bigger 2011 Deficit

By JONATHAN WEISMAN And NAFTALI BENDAVID

Associated Press

A U.S. Government Printing Office staffer works on the federal budget.

President Barack Obama's 2012 budget proposal projects this year's deficit will reach $1.6 trillion, the largest on record, as December's tax-cut deal begins to reduce federal revenues, a senior Democrat said Sunday.

The new forecast is larger than the $1.48 trillion deficit projected last month by the Congressional Budget Office, Congress's nonpartisan scorekeeper, and up from last year's $1.3 trillion shortfall. The tax deal extended tax cuts enacted during the Bush administration while adding others, such as a temporary cut to the payroll tax.

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The prospect of a record deficit is likely to intensify the debate over federal spending and cost controls, which has gripped Washington in recent weeks. Conservative Republicans, many elected with tea-party support, are demanding deep budget cuts for the current fiscal year, which ends Sept. 30.

For now, Mr. Obama and the Republicans are choosing to clash over a narrow slice of federal spending—the 15% devoted to discretionary programs unrelated to security and defense—while the entitlement programs that are driving projected federal deficits remain unaddressed by either party.

Mr. Obama's budget, to be released Monday, calls for spending cuts and tax hikes that would slice about 14% of the approximately $8 trillion in cumulative federal deficits that would occur over the next 10 years without action being taken. It estimates the deficit will fall to $1.1 trillion next year as the economy picks up and the president's proposed spending freeze begins to have effect.

White House officials described the plan as a "down payment" on future deficit reduction. Both political parties are feeling a push from some lawmakers to address spending on Social Security, Medicare and other entitlement programs, which are becoming the largest drivers of the deficit. But both are fearful of proposing changes to popular programs without assurances that the other party will join in the talks.

White House officials believe the time for dealing with entitlements will come soon, when the administration and congressional Republicans come to loggerheads over spending for the current fiscal year or over raising the government's statutory borrowing limit, said Robert Greenstein, executive director of the liberal Center on Budget and Policy Priorities and a White House adviser. To avoid locking the parties into entrenched positions before closed-door negotiations, the White House didn't want to put out proposals that would take fire from both sides.

House Speaker John Boehner (R., Ohio) recently said he "made a mistake'' in backing a higher retirement age for Social Security, because a "conversation'' with Americans was needed first to explain the retirement system's problems.

Social Security, Medicare and other entitlement programs will consume 60% of all federal spending, not counting interest on the debt, next year, or $2 trillion, according to the Congressional Budget Office. By 2021, they will eat up 68% and cost $3.3 trillion.

Mr. Boehner said on Sunday that Mr. Obama's budget leaves spending and debt too far out of balance. "The president's asked us to increase the debt limit, and yet he's going to present a budget tomorrow that continues to destroy jobs by spending too much, borrows too much and taxes too much," Mr. Boehner said on NBC's Meet the Press.

White House aides said two-thirds of the proposed $1.1 trillion in cumulative savings over the next 10 years would come from spending cuts, while a third would come from tax increases and tax-break closures.

White House officials say the cuts they propose for next year's budget will be significant. Low-income heating assistance would be cut nearly in half, by $2.5 billion, according to an administration official. Aid to state and local governments through Community Development Block Grants would be cut by $300 million. Other programs and agencies to see significant spending cuts would include the Army Corps of Engineers; agricultural subsidies; an Environmental Protection Agency water treatment fund for state and local governments; and the Forestry Service.

Some programs that Mr. Obama says are needed to improve U.S. education and competitiveness would see increases. Overall, the budget includes a five-year freeze on domestic spending.

It couldn't be learned what target the White House had set for federal spending as measured against the economy as a whole. A White House deficit-commission last year proposed cutting spending to 21.6% of GDP by 2015, down from 23.8% in 2010.

Mr. Obama's proposed cuts for 2012 reflect a trajectory for federal spending that is far higher than what House Republicans are pressing for. In a plan released Friday evening, House GOP leaders said they wanted to cut $61 billion in federal spending in the remainder of 2011, including from programs long supported by Democrats.

For instance, the White House's $300 million cut to community development grants for all of next fiscal year is more than matched by the House GOP's proposed $3 billion cut to community development in the current year. Head Start, a health and education program for low-income children, would be cut 15.3% in the GOP plan. Democrats say that would cause 218,000 children to be dropped from the program. Nutritional aid for women, infants and children would be cut by 10.3%.

The Food and Drug Administration would be cut by 8.7% under the House GOP plan, and the Environmental Protection Agency, which is emerging as a focal point of the ideological battle between the two parties, would be cut 30%.

The differences between the two visions for federal spending suggest that clashes will soon come on spending for this year and next. The first showdown will come in early March, when a stop-gap spending law that has been funding the government expires. Both parties, however, are playing down the potential for a stalemate that would shut down the government.

A second showdown could come in May, when the federal government hits the statutory limit on borrowing. Before Congress raises the debt limit, Republicans say they will demand stringent cuts in spending.

This summer, House and Senate subcommittees will begin drafting spending bills for fiscal 2012. The Senate, led by Democrats, will likely use the White House plan as a blueprint, but the Republican-dominated House will go its own way, setting off still more clashes in the fall, when those plans must be passed by Congress to keep the government functioning.

Mr. Obama's plan to reduce the deficit by $1.1 trillion over 10 years is short of the $4 trillion in reductions the White House's bipartisan deficit-reduction commission proposed in December. It would bring the country's deficit to around 3% of the country's GDP by 2017, an administration official said. That is higher than the 2.3% threshold the deficit-reduction commission proposed.

The White House would fail to meet a promise made a year ago to balance the budget outside of interest payments on the federal debt by 2015, which would mean a deficit of 3% of GDP.

Even at the levels forecast, the administration is counting savings that it doesn't detail. For instance, the White House budget would stop a long-deferred drop in Medicare reimbursements to doctors for the next two years, and pay for it with $62 billion in cuts to Medicare, Medicaid and other health programs over the next 10 years. Of that, $18 billion would come from ending mechanisms that state governments use to boost Medicaid reimbursements from the federal government. But beyond fiscal 2013, the budget does not lay out offsetting budget cuts for what is likely to be a continuing need to address doctor reimbursement costs.

The White House will propose preventing the alternative minimum tax from expanding to hit more middle-income households, and paying for the change for three years by limiting tax deductions, two administration officials said. The mortgage-interest deduction would be limited for higher-income families. Deductions for charitable giving would be capped, an idea floated last year that went nowhere.

The budget proposal will recommend ending tax cuts for the highest earners, enacted under former President George W. Bush, when they are set to expire at the end of 2012. However, the White House isn't counting the projected $1.1 trillion in higher taxes it would collect in budget forecasts.

White House Budget director Jacob Lew said the budget would enable nine million college students to take advantage of Pell grants, but to pay for that, the budget would eliminate Pell grants during the summer, limiting them to the academic year. Similarly, the budget will help pay for 100,000 new teachers, especially in the math and sciences. But it would also begin applying interest to graduate students' loans while those students are still in school.

Write to Jonathan Weisman at jonathan.weisman@wsj.com and Naftali Bendavid at naftali.bendavid@wsj.com