February 1, 2010 / 6:05 AM / 8 years ago

Q+A-Obama to offer steps to tame the US budget crunch

WASHINGTON, Feb 1 (Reuters) - President Barack Obama on Monday will propose a three-year freeze on many domestic government programs to help tame U.S. budget deficits that hover at levels not seen since World War Two.

The expected 10-year savings of $250 billion, which will be outlined in Obama’s proposed budget for the 2011 fiscal year that begins Oct. 1, would not come close to closing budget deficits that are expected to remain stubbornly high as an aging population drives up spending on retirement and healthcare programs.

Budget experts say Congress must either raise taxes, cut spending or do both to bring the budget back into line but doing so could prove politically difficult.

Obama and many of his fellow Democrats hope two new measures will make it easier for them to reach that goal: a bipartisan commission and “paygo” rules to prevent new deficit spending.

WHAT IS THE PROBLEM?

U.S. debt has more than doubled over the past decade to nearly $12.4 trillion, thanks to a combination of tax cuts, wars in Iraq and Afghanistan, elevated domestic security spending and the deepest recession since the Great Depression of the 1930s.

The government posted a record $1.4 trillion deficit for the fiscal year ended Sept. 30, 2009, and the nonpartisan Congressional Budget Office projects a deficit of $1.35 trillion for the current fiscal year.

This could spur investors including China, the biggest U.S. foreign creditor, to demand higher rates for Treasury bonds. That would push the government’s borrowing costs dramatically higher and crowd out spending in other areas.

WOULD A COMMISSION HELP?

Possibly. Commissions are a time-honored Washington method of outsourcing difficult decisions, enabling Congress to close outdated military bases and shore up Social Security in the early 1980s.

But far more commissions end in obscurity, their findings ignored by lawmakers.

Democratic Senator Kent Conrad and Republican Senator Judd Gregg proposed a bipartisan commission to come up with a way to close the budget gap, but it failed in the Senate last week after interest groups on the left and the right mobilized against it.

Obama plans to set up a similar task force by executive order. It would consist of 18 members: six Republican lawmakers, six Democratic lawmakers, and the remaining six appointed by the administration.

Democratic congressional leaders have pledged that they would ensure that its findings would get a vote, probably after the November congressional elections when lawmakers are presumably feeling less political pressure.

But many Republicans have said they would not participate, viewing it as a vehicle for Democrats to impose tax increases.

IS ‘PAYGO’ AN ISLAND IN THE SOUTH PACIFIC?

No. It’s political shorthand for a set of budget rules that would require any new tax cuts or spending programs to be offset by spending cuts or tax hikes elsewhere. Democrats say similar rules helped the government turn deficits into surpluses in the 1990s.

Both chambers operate under paygo rules currently, but they have frequently been set aside, allowing more than $1 trillion in deficit spending over the past two years, according to Gregg.

The Senate voted along party lines last week to give paygo rules the force of law, which would make it tougher to set them aside. The House of Representatives has passed a paygo law twice already and is expected to sign off on the Senate’s version this coming week.

Bowing to political reality, the bill contains loopholes for expiring tax cuts that Congress is expected to renew, such as the estate tax and the alternative minimum tax, but the exemptions would end after two years.

An exemption for elevated Medicare spending would be phased out five years.

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