© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Last updated: April 13, 2011 6:49 pm
President Barack Obama has called on Congress to create a budgetary straitjacket that would restrict future US deficits, as part of a sweeping plan to rein in America’s debt through a mixture of spending cuts and tax increases.
In a speech on Wednesday, the US president proposed cutting $4,000bn from deficits in the next 12 years, shrinking discretionary spending and the defence budget, and reducing government outlays to Medicare and Medicaid, the largest federal healthcare programmes.
The target is roughly in line with the $4,400bn in deficit reduction over a decade that Republicans in House of Representatives proposed last week and the $3,900 in cuts by 2020 recommended by the bipartisan fiscal commission in December.
But the White House plan assumes a three-to-one ratio of spending cuts to tax increases, whereas House Republicans are proposing no new revenues.
Mr Obama assumes the continuation of last year’s healthcare reform, strengthening mechanisms in the bill designed to limit costs and setting a target for Medicare to grow no faster than gross domestic product plus 0.5 per cent. The Republican plan made more radical transformations to both Medicare and Medicaid.
According to the White House, the proposal would bring US deficits down to 2.5 per cent of gross domestic product by 2015, and close to 2 per cent by the end of the decade.
Mr Obama said that if fiscal discipline was lost, and America’s debt levels failed to stabilise by 2014, automatic spending cuts and a reduction in tax breaks would be triggered. This would ensure that US deficits would be capped at an average of 2.8 per cent during the second half of the decade.
The debate over fiscal policy has come to dominate America’s political landscape in the wake of last year’s congressional election, which gave sweeping gains to Republicans who pledged to shrink federal government.
After agreeing a 2011 budget last week – narrowly averting a government shutdown – Mr Obama and congressional leaders are setting out their positions ahead of a battle over raising the debt limit of $14,300bn to avoid a default, and an expected fight over next year’s budget.
The US deficit for this year is a projected 10.9 per cent of GDP, declining to 2.9 per cent by 2018 before it rises again because of the ageing population.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in