Washington faces a new and damaging clash over tax and spending later this year after Barack Obama released a $3.7tn budget on Wednesday that offered controversial concessions to the Republicans on welfare cuts but that fell well short of the changes needed to win them over.

Obama presented what he claimed was a balanced budget that would not add to the deficit. Given the polarised state of politics in Washington, the budget, which runs to more than 2,000 pages, stands no chance of being passed.

The 10-year budget plan, due to kick in on 1 October, proposes $250bn in new spending on infrastructure, education and other job creation measures. It anticipates raising $800bn in new taxes, of which $563bn would come from the richest Americans and $78bn from a rise in the cost of cigarettes.

The plan proposes $1tn in cuts, including to social security programmes, mainly through changing the inflation index.

The welfare changes are aimed at winning over Republicans but are regarded by many Democrats as a betrayal of the party tradition.

Delivering his statement in the Rose Garden at the White House, Obama warned he was not going to embark on entitlement reforms without the Republicans agreeing to closing tax loopholes that benefit corporations and the wealthy.

"That's the bottom line. If you are serious about deficit reduction, then there is no excuse to keep these loopholes open.They don't serve an economic purpose. They don't grow our economy. They don't put people back to work. All they do is allow folks who are already well off and well connected to game the system," Obama said.

"If anyone thinks I'll finish the job of deficit reduction on the backs of middle-class families, or through spending cuts alone that actually hurt our economy short-term, they should think again. When it comes to deficit reduction, I have already met Republicans more than halfway."

Republican House speaker John Boehner, who has proved to be Obama's most implacable opponent over the past three years, welcomed the prospect of entitlement reform but described the proposals as modest. In a sign of the showdown to come, he warned Obama he should not use entitlement reform as bargaining chips for tax increases.

The prospect of a Democratic president prepared to make cuts to social security and Medicare, which offers health provision for those over 65, has alarmed progressives. Obama, in his Rose Garden statement, sought to reassure Democrats who see welfare reform as a betrayal of the party tradition. "If we want to keep Medicare working as well as it has, we have to make some changes … but they don't have to be drastic," he said. If there was delay, reforms further down the line would be drastic.

In a further attempt to pacify Democrats, he added: "I don't believe that all these ideas are optimal, but I'm willing to set them as part of a compromise. If – and only if – they contain protections for the most vulnerable Americans."

The budget is just one of three completely different budgets in circulation. The Democratic-led Senate has passed its own version, which focuses on raising taxes without welfare reform, and the Republican-led House another, focused on welfare reform but with no tax increases.

All three proposals are designed to replace draconian across-the-board cuts, automatically triggered earlier this year as a result of the failure of the White House and Congress to reach a compromise on spending.

Obama, with little hope of winning over the Republican leadership, is hoping to bypass them by securing the backing of rank-and-file Republicans in Congress, and is hosting a White House dinner for about a dozen of them Wednesday night.

Many of the welfare reform proposals in the White House budget were made by Obama in private talks with Boehner in 2011, part of the president's search for a 'grand bargain' that he hoped would bring an end to the debilitating White House-Congress confrontations but which Boehner eventually walked away from.

Boehner, speaking at a press conference in Congress to respond to the Obama budget, referred to these talks. "While the president has backtracked on some of his entitlement reforms that were in conversations that we had a year and a half ago, he does deserve some credit for some incremental entitlement reforms that he has outlined in his budget. But I would hope that he would not hold hostage these modest reforms for his demand for bigger tax hikes."

The Republican leader in the Senate, Mitch McConnell, in a speech in the chamber, welcomed the prospect of negotiation on welfare reform, but rejected the budget overall, saying it would not bridge the gap between Democratic and Republican proposals. "The budget simply does not represent some grand pivot from left to centre. It's really just a pivot from left to left," McConnell said.

Sean West, an analyst at Eurasia group, said: "The point of this budget is not to draft a workable plan – it's to position Obama as the last man looking for a grand bargain. I'm not sure anyone really thinks trading entitlement reform for tax reform really works anymore. Both parties have moved on."

He said that Obama and Congress were now "jostling" for position ahead of negotiations to raise the US's debt ceiling in August. "Obama's budget is a political move, not a fiscal one. We are heading toward August without a compass. Ultimately Congress will raise the debt ceiling but I doubt there will be a grand bargain."

Paul Dales from Capital Economics said the "worst-case scenario" was that no deal was reached and the debt ceiling was not raised in August. "That would have a real impact on the economy, people would not get paid. I can't believe it will go that far but I imagine it will get close," he said.

He said it was not clear what impact the persistent infighting was having on the wider economy. "It creates uncertainty but there comes a point where uncertainty is the new normal. We have these battles every six months, the world does not end, people get used to it," he said.