U.S. deficit could reach $1.6 trillion

U.S. President Barack Obama's proposed budget predicts the national deficit will crest at a record-breaking almost $1.6 trillion US in the current fiscal year, then start to recede in 2011 to just below $1.3 trillion.

Still, the administration's new budget to be released Monday says deficits over the next decade will average 4.5 per cent of the size of the economy, a level that economists say is dangerously high if not addressed.

A congressional official provided the information, which comes from a White House summary document circulating freely on Capitol Hill and among Washington lobbyists. The official spoke on condition of anonymity because the spending proposal is not supposed to be made public until Monday.

Details of the administration's budget headed for Congress include an additional $100 billion to attack painfully high unemployment. The proposed $3.8-trillion budget would provide billions more to pull the country out of therecession, while increasing taxes on the wealthy and imposing a spending freeze on many government programs.

Administration projections show the deficit never dropping below $700 billion, even under assumptions that war costs will drop precipitously to just $50 billion in some years instead of more than three times that this year and next.

White House spokesman Robert Gibbs said the administration believed "somewhere in the $100-billion range" would be the appropriate amount for a new jobs measure made up of a business tax credit to encourage hiring, increased infrastructure spending and money from the government's bailout fund to get banks to increase loans to struggling small businesses.

That price tag would be below a $174-billion bill passed by the House of Representatives in December but far higher than a measure that could come to the Senate floor this week.

Gibbs said it was important for Democrats and Republicans to put aside their differences to pass a bill that addresses jobs, the country's No. 1 concern.

"I think that would be a powerful signal to send to the American people," Gibbs said in an appearance on CNN's State of the Union.

Job creation was a key theme of the budgetObama was sending Congress on Monday, a document designed, as was the president'saddress, to reframe his young presidency after a protracted battle over health care damaged his standing in public opinion polls and contributed to a series of Democratic election defeats.

Obama's $3.8-trillion spending plan for the 2011 budget year that begins Oct. 1 attempts to navigate between the opposing goals of pulling the country out of a deep recession and dealing with a budget deficit that soared to an all-time high of $1.42 trillion last year.

Congress debates

Obama's new budget will set off months of debate in the Democrat-controlled Congress, especially in an election year in which Republicans are hoping to use attacks against government overspending to gain seats. Obama has argued that he inherited a deficit of more than $1 trillion and was forced to increase spending to stabilize the financial system and combat the worst recession since the 1930s.

Obama's new budget was expected to repeat many of the themes of his first budget. But in a bow to worries over the soaring deficits, the administration is proposing a three-year freeze on spending for a wide swath of domestic government agencies.

Military, veterans, homeland security and big benefit programs such as Social Security and Medicare would not feel the pinch.

The freeze would affect $447 billion in spending and is designed to save $250 billion over a decade. However, it would not fall equally on all domestic agencies. Some would see budget cuts to free up spending for programs the administration wants to expand, such as education and civilian research efforts.

NASA's mission to return astronauts to the moon would be grounded with the space agency instead getting an additional $5.9 billion over five years to encourage private companies to build, launch and operate their own spacecraft for the benefit of NASA and others. NASA would pay the private companies to carry U.S. astronauts.

Obama's budget repeats his recommendations for an overhaul of the U.S. health-care system, the fight that dominated his first year in office. It proposes to get billions of dollars in savings from the Medicare program and again seeks increased taxes on the wealthy by limiting the benefits they receive from tax deductions. Both ideas have met strong resistance in Congress.

Gibbs insisted Sunday that the president's push for health care was "still inside the five-yard line," but Senate Republican leader Mitch McConnell, also appearing on CNN, said the public was overwhelmingly against the bill and the administration should "put it on the shelf, go back and start over."