The president’s budget promises major investments to spur a manufacturing revival. Obama rolls out $3.8 trillion budget

Putting his chips on manufacturing and new energy sources, President Barack Obama rolled out his new $3.8 trillion budget Monday, trying to balance the August debt accords against his own judgment that too much austerity, too fast will spell trouble for the economy — and his own reelection chances in November.

From Justice to Defense and Homeland Security, as many as six Cabinet-level departments or agencies will see their budgets shrink in compliance with the new appropriations caps. But Obama would also go outside the box, committing tens of billions of dollars to new mandatory spending initiatives and for the first time, tapping war savings to fund his domestic agenda.


“We can’t cut back on those things that are important for us to grow,” the president told students in Northern Virginia, highlighting the budget’s new $8 billion plan to help community colleges partner with industry as training centers for a new generation of skilled workers. Within the Energy Department, he wants a $6 billion HomeStar rebate proposal to reward homeowners who retrofit their property. And elsewhere the budget includes a pair of $1 billion commitments to promote advanced electrical vehicles and develop a network of manufacturing innovation institutes.

Perhaps, the biggest single item is an ambitious $476 billion, six-year transportation package — a nearly 50 percent increase over current spending that is largely financed by plowing back $231 billion of savings attributed to scaling back U.S. military operations in Iraq and Afghanistan.

This novel scheme avoids any unpopular increase in federal gasoline taxes, just as Obama wants to minimize any increase for middle-class households, whose spending he needs for the economy. That leaves the wealthy as his primary target, and the president appears more aggressive in targeting dividend income as well as exclusions for employee retirement contributions.

Even so, the president is hard-pressed to make much headway on the deficit without taking on benefit programs like Medicare and Medicaid or accepting some increase in middle-class tax rates.

As it is, the extension of special middle-class protections under the alternative minimum tax costs him $1.9 trillion — almost as much as the additional $2.17 trillion attributed to his keeping the Bush-era tax cuts for middle- and working-class families, due to expire next year. Add these two decisions together, and it’s enough to eat up all of the $3.17 trillion in new deficit reduction that Obama musters in his blueprint.

The bottom line, then, is a fourth straight year of $1 trillion-plus deficits and only marginal improvement in 2013 when the shortfall will narrow to $901 billion — still a far cry from what Obama had promised when he took office in 2009.

Indeed, even if Obama were to win a second term and prevail on his entire tax agenda, the budget tables show that the deficit won’t fall back below 3 percent of GDP until 2018 — after he will have left the White House.

Republicans were scathing in their reaction. “Today we are witnessing one of the most spectacular fiscal cover-ups in American history,” said Alabama Sen. Jeff Sessions, ranking member on the Senate Budget Committee. House Budget Committee Chairman Paul Ryan (R-Wis.) dismissed the president’s efforts as a “recipe for a debt crisis and the decline of America.”

In response, a senior administration official told POLITICO that those who complain loudest should be cautious about what they ask for.

“You talk to any number of economists, and there is not a lot of clamor for the U.S. to slam on the brakes in 2012 or in 2013,” he said. “It would hurt not just our economy but also Europe. There will be a chorus of complaints, but if you really were to follow through on what is said, it would do more damage.

“I’ve been on the fiscal conservative side of these arguments. It’s easy to say ‘We should take our medicine now.’” But sometimes taking too much medicine, or the wrong kind, does more harm.”

However slow, the downward path to less than 3 percent of GDP is credible, the official argued. And in designing that path, he said, the White House looked for a formula where deficits would not suddenly spike up again in the future.

That said, it is an election year, and Obama plainly constructed his budget to light a spark after all the economic troubles of recent years.

“It’s morning again in America,” was Ronald Reagan’s pitch seeking a second term after hard times in the 1980s. Obama’s own narrative leapfrogs back to the post-World War II era, evoking the glory years of American manufacturing and a period when the GI Bill embodied a confidence in education and a shared sense of opportunity to move up economically.

“America was built on the idea that anyone who is willing to work hard and play by the rules, can make if they try — no matter where they started out,” Obama says, in his opening budget message to Congress. “But for many Americans (today), the basic bargain at the heart of the American dream has eroded.”

The two most immediate flash points with Republicans will be the question of war savings and taxes.

From the administration’s standpoint, Obama has taken some risk to himself by pushing ahead with the U.S. withdrawal from Iraq and his plan to bring home American forces from Afghanistan as well. As a result, the annual Overseas Contingency Operations appropriations, which totaled $145.9 billion for the two wars when Obama took office, will drop to $96.7 billion in 2013 — a one-third reduction.

Over 10 years, the president’s budget is assuming $848 billion in savings, half of which he would count toward deficit reduction. But Obama appears to want to keep the second half at his disposal to finance new investments in transportation, and the first $231 billion down payment for the six-year bill could then grow.

In the case of taxes, the budget never spells out Obama’s much-talked-about “Buffett rule” — under which the wealthy must pay an effective tax rate of at least 30 percent. But his long-term deficit reduction plan rests very much on achieving $1.43 trillion in 10-year revenue increases at the households with annual income of more than $250,000. And the avid presidential golfer even throws in an additional $593 million proposal to do away with tax deductions for conservation easements on golf courses.

Just two years ago, Obama was content to let the tax rate on dividends and capital gains — now 15 percent — continue to enjoy some preference at a 20 percent rate. But his budget now assumes $206 billion in 10-year revenues from treating dividends as ordinary income subject to top-end rates twice as high.

As recently as last fall, the White House proposed to save $410.1 billion by limiting deductions and other preferences for the wealthy. That portfolio has clearly grown because the budget assumes revenue savings of $584 billion over 10 years.

Given the current impasse over Obama’s payroll tax holiday, it is significant that his budget makes clear he will not call for another extension next winter. Experienced tax writers would argue then that it might be better to step down the tax rate gradually in the last quarter of this year, for example. And that could reduce the cost and make a deal more feasible.

After the rancor of 2011, the White House and Republicans could well fight to a draw on many of these issues in 2012 — even as each side must look over its shoulder at the threat of a $1.2 trillion sequester beginning in 2013 unless there is some progress on deficit reduction.

The one area where there is greater hope of real action is the appropriations process — the dozen annual spending bills that fund the daily operations of government. The caps agreed to last summer ensure some predictability, and Obama’s budget brings into focus how much discretionary spending has already begun to fall and the tough choices this requires.

Just two years ago, for example, Obama was predicting domestic or “nonsecurity” outlays in 2013 would be $477 billion. The new budget assumes $410 billion — a real cut of 14 percent, even without accounting for inflation.

It’s an atmosphere that makes it harder for new initiatives to get any footing — and easier for critics to justify cuts from policies they oppose.

Obama is again seeking $308 million for the Commodity Futures Trading Commission to implement financial reforms, and this time the White House is proposing new fees to cover the cost. The Securities and Exchange Commission is requesting $1.566 billion, a $245 million increase that is larger than the CFTC itself. But it stands a better chance given the SEC’s existing power to cover its costs with fees collected from industry.

Elsewhere, the Environmental Protection Agency will be trimmed further to $8.34 billion — its third straight series of cuts. The National Aeronautics and Space Administration gets less this year than last. Biomedical research funds at the National Institutes of Health are frozen at $30.7 billion. And all the real growth in the Food and Drug Administration’s $4.48 billion budget is dependent on new industry user fees, including a proposed $220 million food establishment charge that could prove controversial.

The Pentagon’s core budget, $514.2 billion, drops for the first time since the 1990s. At the same time, total resources for the State Department and foreign aid would continue to grow to $51.6 billion, including a new $770 million Middle East and North Africa Incentive Fund to advance democratic and economic reforms after the turmoil of the past year.

The total $11.5 billion request for the Department of Interior, so important to wildlife services and Western lands, is up just roughly 1 percent. By comparison, the Education and Energy departments are robust winners.

Obama’s Race to the Top initiative is promised $850 million, a 55 percent increase. Energy’s total resources would grow by about $1.4 billion, a 5.6 percent increase that reflects a whopping $522 million or 29 percent increase for renewable-energy sources and an additional $174 million for a revamped industrial technology-advanced manufacturing program.

In the science arena, NASA falls, NIH is frozen but the National Institute of Standards and Technology is promised $860 million in 2013, a 13 percent increase owing to its emphasis on advanced-manufacturing research. The same theme echoes in the National Science Foundation’s $7.37 billion budget, a nearly 5 percent increase.

Inside the Health and Human Services Department, the Head Start program for low-income preschool children must settle for a modest plus-up. By comparison, the Center for Medicare & Medicaid Services will receive a $1 billion, 26 percent increase in its program management funds given CMS’s increased responsibilities under Obama’s health care reforms.

To be sure, there are also small surprises. After a series of costly accidents, including a crude-oil leak into the Yellowstone Riverin Montana last summer, the administration appears intent on putting more money into pipeline safety. The new budget proposes an estimated $276 million for the Pipeline and Hazardous Materials Safety Administration including a 60 percent increase in PHMSA’s pipeline safety accounts to hire more inspectors and standardize state pipeline programs.