Obama's economic kick-start will quadruple US debt

President's spending will bring highest deficit since end of Second World War

(GETTY IMAGES)

The US federal deficit is set to quadruple this year to a breathtaking 12.3 per cent of gross domestic product under Barack Obama's first budget – designed simultaneously to haul the country out of the crippling recession and serve as a springboard for the biggest overhaul of the national economy since Franklin Roosevelt's New Deal.

Thanks mainly to the recently passed $787bn (£550bn) stimulus package and a possible extra $250bn to rescue the banking system, as well as fully disclosed spending on the wars in Iraq and Afghanistan, the 2009 shortfall will leap to a projected $1.75trn, from $459bn in 2008. Even that last figure was the largest dollar deficit ever recorded. In percentage terms, this year's deficit will be America's highest since the Second World War.

But for Mr Obama there is no alternative as he sets out to rebuild the wounded economy "from the foundations up" and overturn what he called yesterday the "legacy of mismanagement and irresponsibility" inherited from George Bush.

Flanked by Vice-President Joe Biden and the Treasury Secretary, Tim Geithner, the President insisted this budget marked an end to the "dishonest accounting" of the Bush era, when decisions were taken in secrecy, policies were based on unrealistic assumptions and costly items like the Iraq war were simply kept off the books.

But the proposals for the future are as ambitious as his criticism of his predecessor was scathing. The budget calls for a surge in spending on healthcare, education and clean, renewable energy, in which Mr Obama wants to invest $150bn over the next decade. This would be partly financed by a greenhouse gas emissions trading system, or "carbon tax", to help tackle global warming.

The President is also proposing a 10-year, $634bn reserve for healthcare reform, with the goal of insurance cover for all Americans. Only if the US tackles these three areas, he warned Congress on Tuesday, can it be sure of long-term recovery and prosperity.

No less ambitious (critics would say implausible) is Mr Obama's goal of bringing the deficit down by two-thirds to $581bn in 2012, the final year of his term. This would be achieved mainly by increasing taxes on people earning more than $250,000 a year – raising the top income tax band to 39 per cent from the current 35 per cent – and by eliminating waste. His administration claims to have identified a staggering $2trn of outlay over 10 years on government programmes that either do not work or are not needed. Lower defence spending should also help. Though the Pentagon's overall budget is slated to rise by 4 per cent in 2009, to $663bn, it should start to fall after 2010 as operations in Iraq are wound down. Mr Obama wants to withdraw all US combat troops by the end of next summer.

The White House says such a colossal deficit is unavoidable if the decline in the economy is to be halted this year, paving the way for recovery from 2010. The US has lost 3.6 million jobs in the past 13 months alone. The economy shrunk by 3.8 per cent in the final quarter of 2009, the biggest such decline in almost 30 years, and – if anything – the news is getting direr by the day. More optimistic than many private forecasters, the budget predicts that GDP will contract by 1.2 per cent over the whole year, before rebounding by 3.2 per cent in 2010.

The question is how much of what Mr Obama seeks will come to pass. The White House may propose, but it is Congress that disposes, writing the legislation that turns budgets into law. Although the Democrats have large majorities on Capitol Hill and the President is enormously popular, there is no guarantee his party will march as one on such momentous issues.