Obama seeks to halve annual deficit within term

Wants higher taxes for rich, troop reduction

President Obama and Vice President Joe Biden before addressing the US Conference of Mayors in the East Room of the White House on Friday in Washington. The president plans to set a goal to reduce the deficit he inherited by at least a half. (Chip Somodevilla/Getty Images)

WASHINGTON - After a string of costly bailout and stimulus measures, President Obama will set a goal this week of cutting the annual deficit at least in half by the end of his term, administration officials said.

This reduction will come in large part through Iraq troop withdrawals and higher taxes on the wealthy.

Obama's budget outline, which he will release Thursday, will also confirm his intention to deliver this year on ambitious campaign promises on healthcare and energy policy.

Obama inherited a deficit for 2009 of about $1.2 trillion, which will rise to more than $1.5 trillion, given initial spending from his just-enacted stimulus package. His budget blueprint for the 2010 fiscal year, which begins Oct. 1, will include a 10-year projection showing the annual deficit declining to $533 billion in the 2013 fiscal year, the last year of his term, officials said.

Measured against the size of the economy, that would mean a reduction from a deficit equal to more than 10 percent of gross domestic product - larger than any deficit since World War II - to 3 percent, which is the level that economists generally consider sustainable. Obama will project deficits at about that level through 2019, aides said.

In his weekly radio and Internet address yesterday, Obama said his first budget was "sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don't, and restoring fiscal discipline."

"We can't generate sustained growth without getting our deficits under control," he added.

Obama will propose to tax the investment income of hedge fund and private equity partners at ordinary income tax rates, which are now as high as 35 percent and could return to 39.6 percent under Obama's plans, instead of at the capital gains rate, which is 15 percent at most.

Senior Democrats in Congress joined with Republicans in 2007 to oppose that increase, signaling a fight ahead.

But with Wall Street discredited and lucrative executive compensation a political target, the provision could prove more popular among lawmakers - even if it would not bring in much money until the economy recovers.

Obama will also call for letting the Bush tax cuts on income, dividends, and capital gains lapse after 2010 for individuals who make more than $250,000 a year.

As a candidate Obama called for immediately repealing those tax cuts; he decided instead to keep them in place through 2010, as scheduled, reflecting the widespread belief that raising taxes further depresses economic activity.

As for war costs, Obama's campaign projected that withdrawing combat troops from Iraq would save about $90 billion a year.

But it is not clear how much any savings would be offset by increased spending in Afghanistan, where Obama has ordered an additional 17,000 troops, bringing the total there to 56,000.

The budget will provide the first clues of how Obama will reassert fiscal discipline after signing into law a $787 billion economic recovery plan. As difficult as cutting the deficits will be, much of the reduction by the end of his term will simply reflect an end to spending from the two-year stimulus package and - assuming the economy recovers - higher tax revenues and lower expenditures for safety net programs like unemployment compensation.

Obama will propose to cut a variety of programs, among them the Medicare Advantage subsidies for insurance companies that cover seniors who can otherwise acquire health coverage directly from the government.

Another target is spending on private contractors, especially for defense, which spiked during the Bush administration. And he will scale back some promises, including his proposal to double money for foreign aid.

The budget on Thursday will climax a week of reminders of the nation's fiscal plight. Tomorrow, Obama will hold a "fiscal responsibility summit" at the White House with members of Congress from both parties, economists, union leaders, and business representatives.

On Tuesday he will make a address a joint session of Congress - the equivalent of a State of the Union speech for a new president - that advisers said would focus on the economy.

Yet Obama will inflate his challenge by forsaking several gimmicks that the Bush administration used to make deficits look smaller. He will include war costs in the budget; Bush did not.

Obama also will not count savings from laws that establish lower Medicare payments for doctors and expand the alternative minimum tax to hit more taxpayers - both of which Bush and Congress routinely took credit for, while knowing they would later waive the laws to raise doctors' payments and limit the reach of the tax.