Obama's budget dilemma: Jobs versus deficits (News Feature)

By Chris Cermak Feb 2, 2010, 2:04 GMT

Washington - US President Barack Obama faced a delicate balancing act in presenting his budget for next year: stimulating the economy without bankrupting the government.

The dilemma has only worsened after a year in which the Obama administration spent unprecedented amounts of public money to wrest the world's largest economy from its deepest economic crisis since the Great Depression of the 1930s.

Government spending helped return the US economy to growth in the second half of 2009, but that recovery has yet to translate into new jobs - a problem facing many wealthy countries around the world as they emerge from the global recession.

With US unemployment at a quarter-century high of 10 per cent, Obama declared jobs his 'number-one focus' for 2010 in a State of the Union address last week to Congress.

At the same time, the White House has acknowledged that federal deficits are running at dangerously high levels. In presenting his 2011 budget proposals Monday, Obama said: 'We simply cannot continue to spend as if deficits don't have consequences.'

The federal government will run a record 1.6-trillion-dollar deficit this budget year, about 10.6 per cent of gross domestic product (GDP), before falling to 1.3 trillion dollars in the 2011 budget, which starts October 1.

Which priority is more important - jobs or debt - depends on who you ask. Some left-leaning politicians said Obama was spending too little to revive job growth, while conservatives fretted that government deficits remained far too high to calm market concerns.

'The president has sent us more of the same - a budget that claims to be fiscally responsible, but just below the surface contains more spending, more borrowing and more taxes,' said Judd Gregg, the top Republican on the Senate's Budget Committee.

Obama's budget sought to walk a fine line between the two sides. The document included 100 billion dollars in targeted business tax incentives and other measures to encourage hiring, but pledged other spending cuts and higher taxes on the highest-earning Americans and Wall Street banks.

Both tasks are fraught with political risk: new spending on jobs could be deemed wasteful if there is no noticeable improvement in the unemployment rate, while curbing the deficit too quickly - or too slowly - could strangle the country's economic recovery.

Even with the new job stimulus measures, the White House expects the labour market will recover extremely slowly, a fact that could severely impact the chances of Obama's Democrats in mid-term congressional elections scheduled for November.

Christina Romer, head of the White House Council on Economic Advisors, projected that unemployment will remain at 9.8 per cent at the end of this year before falling to 8.9 per cent by the end of 2011 and 7.9 per cent at the end of 2012.

John Irons of the left-leaning Economic Policy Institute argued that the Obama administration is still spending too little - the enormity of the jobs crisis means that reviving the labour market should take precedence over tackling the deficit.

'The first thing we must do to address the long-term debt is to put Americans back to work so we can get the recovery on the right track,' Irons said.

Bringing down the deficit carries its own challenges including political resistance to cutting popular spending programmes.

'We need to get those deficits down in the future so that we don't choke off economic activity and job creation,' said Peter Orszag, director of the White House Office of Management and Budget. 'But we don't want to act too rapidly to bring down the deficit because that would exacerbate the jobs deficit.'

Obama chose a middle ground - politically and economically - by proposing smaller spending cuts but calling on Congress to support a bipartisan fiscal commission that can dictate further steps.

The budget would lower the federal deficit to 3.9 per cent of GDP by 2015. Over the next 10 years, the average annual deficit will be about 4.5 per cent, well above the consensus target of a deficit below 3 per cent of GDP.

The White House said it won't propose more spending cuts without the blessing of a fiscal commission. Such a panel was rejected by the Senate last week, but Obama has pledged to create one by executive order instead.