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Will deficits trim Obama's agenda?

Even Democrats signal adjustments are likely, given rising projections for budgetary red ink.

By Staff writer / March 22, 2009

Flanked by Senate and House Budget Committee Chairmen Sen. Kent Conrad (foreground) and Rep. John Spratt Jr, President Barack Obama spoke after their meeting in Washington on Tuesday, March 17, 2009. It's increasingly less likely that the president's budget will survive with its key elements intact.

Gerald Herbert/AP

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Washington

Democrats had hoped to launch the budget debate on Capitol Hill this week with a focus on their priorities: cleaner energy, healthcare reform, and education. Instead, they’re embroiled in a game-changing debate with Republicans over whether government – the White House, Congress, the bureaucracy, even the Federal Reserve – has what it takes to manage the financial crisis.

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Between the AIG bonus debacle and prospects for $1 trillion annual deficits into the next decade, the likelihood is fading that President Obama’s first budget will survive with its key elements intact. The historic deficit numbers, in particular, make a tough sell on the budget even tougher, though some Democratic lawmakers say it’s not out of reach.

“The reality is we are going to have to make adjustments to the president’s budget if we want to keep the deficit on a downward trajectory,” said Sen. Kent Conrad (D) of North Dakota in a statement Friday, after the Congressional Budget Office (CBO) released projections showing federal red ink would total $9.4 trillion over a decade.

Sen. Charles Grassley of Iowa, the top Republican on the Senate Finance Committee, was more blunt.

“People can afford only so much government spending, even for the worthiest-sounding causes,” he said in a statement. “The White House should take a break from the heavy sales job on the budget.”

How much the government should do to try to buttress the weak financial system and spur a flagging economy is the germane question before Congress – and the news from last week may serve to point out the limits of government oversight and financial acumen to date.

First came word that Congress itself had inserted language into a bill that would allow $165 million in retention bonuses at insurance giant American International Group (AIG), rescued from bankruptcy by $170 billion in US taxpayer dollars.

“Congress ... entered a state of self-inflicted wounds,” says John Pitney, a political scientist at Claremont McKenna College in Claremont, Calif. “They themselves voted for legislation that explicitly approved the bonuses. I doubt many of them even knew, because they didn’t read the bill.”

Then, from the CBO, came another blow: The US budget deficit this year would reach $1.8 trillion – and the Obama forecast for the next 10 years would produce deficits totaling $2.3 trillion more than the White House had predicted in its budget blueprint.

The federal budget deficit in fiscal year 2008 was $455 billion (3.2 percent of gross domestic product), up from $162 billion (1.2 percent of GDP) in fiscal 2007. The deficit as a share of the US economy is expected to climb to 11.9 percent this fiscal year, the highest level since World War II, as the government spends on banks and stimulus measures. Next year, the budget gap will be 7.9 percent of GDP, the CBO said.

“It’s just beginning to sink in what the long-run effect of stimulus spending will be – from the audacity of hope to the gravity of reality,” says Mr. Pitney.

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