Obama's Budget

The President of the United States, Barack Obama, began to make good on his campaign promises when he presented the main ideas of his budget proposal for the fiscal year of 2010. The plan includes more educational spending, the first steps towards health care reform, higher taxes for families with annual incomes of $250 million or higher, less taxation of the poor, subsidies for baby food, more money for environmental programs, and a reduction of spending on the War in Iraq. Also – and this is good news for Brazil – the plan includes a gradual reduction in agricultural subsidies.

The new fiscal year in the United States begins in October. The government still has to send Congress a complete budget proposal and will probably face, right off the bat, six or seven months of very difficult negotiations not only with Republicans, but also with the more conservative wing of the Democratic Party. In this group, there will also be resistance to the increased so-called social spending and to the increased tax burden on families of higher income levels. “Change is not running up even bigger deficits than George Bush did,” commented Congressman Gene Taylor, a Democrat from Mississippi. “The era of big government is back, and Democrats want you to pay for it,” commented the minority leader of the House of Representatives, John Boehner, of Ohio.

But Obama’s explicit commitment is to reduce the deficit in the next few years. For this fiscal year, they predict a budget hole of $1.75 trillion, equal to 12.3% of the Gross Domestic Product (GDP). This deficit will be made worse, in large part, by the banks and government spending to revive the economy. For the next fiscal year, they predict a budget expenditure of $3.55 trillion, with a final deficit of $1.17 trillion.

According to the director of the Office of Management and Budget, Peter Orszag, the plan is to cut the deficit by $533 billion in 2013. The revival of the economy, the increase of taxes for the upper class, the battle against tax evasion, the reduction of military spending, and the increase in government efficiency will permit this result, held Orszag.

The tax increase for families of high incomes will make it possible, according to the government, to supply a fund of $634 billion in the next ten years to reform the health care system and extend medical assistance to 43 million people currently without coverage. This is the main justification for not renewing tax cuts for high income families, which are anticipated to end in 2010. The additional revenue will not be officially marked for that purpose, but the idea is to link this money, in practice, with that fund.

During the campaign, Obama did not make any definitive statements about opening up the American market more and contributing to free trade. His comments about trade were almost always in the opposite direction and he came to advocate a revision of the North American Free Trade Agreement (NAFTA), in effect for over ten years with Mexico and Canada. But his proposal to cut $9.8 billion in subsidies to farmers in ten years with an annual revenue of more than $500 thousand can contribute to better functioning of the market. There will certainly be strong pressure against Obama. The subsidized farmers have very active representatives in Congress and their lobbies are powerful. If Obama won this dispute, it could facilitate the resumption of the Doha round of trade negotiations.

The government experts hypothesize an economic recession of 1.2% this year and an expansion of 3.1% in 2010. Then medium growth until 2013, which would put it at 3.8%. Some analysts call these predictions excessively optimistic.

A review of the numbers of last year’s fourth quarter seem to prove the claims of the more cautious. The GDP in the last quarter of 2008 diminished at a rate of 6.2% a year, the worst results since the first quarter of 1982. The bad performance of the economy in the end of last year resulted primarily from the reduction of consumption. The penny pinching, according to analysts, will most likely continue until the end of the semester and that will keep production very low. Obama will have to negotiate his first budget in a very pessimistic environment.