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Obama warns on deficit

President Barack Obama pitched job-creation plans to recession-weary Americans while his advisers urged Congress to take further measures to rein in the record budget deficit.

Even as he unveiled a $30 billion scheme to boost small-business lending, Obama acknowledged the need for restraint, warning that record deficits could threaten the economic recovery.

“These deficits won't just burden our kids and our grandkids decades from now,” Obama said in the politically competitive state of New Hampshire. “They could damage our markets now, they could drive up our interest rates now, they could jeopardize our recovery right now.”

The divergent messages reflected the challenge Obama faces as he promotes the $3.8 billion budget he proposed on Monday combining short-term job-creation plans with long-term austerity measures to head off a potential debt crisis.

Even Obama's fellow Democrats, worried that fears about the economy could threaten their majority in Congress in November's elections, questioned whether his budget would accomplish both goals.

“As the recovery takes hold, we then must pivot and deal with the long-term debt. And the place where I'd fault this budget is I don't see the pivot,” said Senate Budget Committee Chairman Kent Conrad, a Democrat.

Obama proposed using money from the unpopular Wall Street bailout program for a small-business lending fund, part of a $100 billion package in the budget proposal aimed at bringing down the 10% unemployment rate.

Democrats hope to bring down the unemployment rate before the elections, but some questioned whether a jobs tax credit -- a central element of the administration's jobs package -- would actually induce businesses to step up hiring.

“I think this jobs tax credit talks a little better than it walks,” Democratic Representative Lloyd Doggett told Peter Orszag, the White House's budget director.

Despite deficit-reducing gestures like a proposal to impose a three-year spending freeze on domestic programs, Obama is unlikely to get support from Republicans who feel the wind at their backs after a surprise Senate victory in Massachusetts.

Representative Paul Ryan, the top Republican on the House Budget Committee, outlined a rival budget proposal that would restructure entitlement programs like Medicare, the healthcare program for the elderly, and Social Security to balance the budget. Democrats said his proposal would dismantle those popular programs.

New Hampshire Republican Senator Judd Gregg blasted the small-business lending idea in a contentious Senate in which he demanded the money be used instead to bring down the deficit.

“It's become a piggybank that adds to our deficit, adds to our debt and gets put on our children's backs,” Gregg told Peter Orszag, the White House's top budget official.

The Obama administration is prepared to impose fees on financial firms for as long as necessary to ensure that every cent spent on bailing out banks is repaid, Treasury Secretary Timothy Geithner told the Senate Finance Committee.

White House economic adviser Paul Volcker urged lawmakers to rein in risky trading by big banks to prevent them from becoming “too big to fail.”

The White House projects that the deficit for the fiscal year ending September 30 will amount to 10.6% of gross domestic product, the highest level since World War Two.

The White House predicts deficits will fall to 3.9% by 2014, still above the 3% of GDP that economists consider sustainable.

Orszag said Congress would have to do two things to close that gap: pass healthcare reform and cooperate with a proposed bipartisan deficit-reducing commission.

Both those could be difficult. The Senate and the House have passed healthcare reform bills that the White House believes would bring skyrocketing medical costs under control.

But the legislation stalled when Democrats lost a US Senate seat in Massachusetts last month, depriving them of the 60 seats needed to overcome Republican procedural blocking.

The White House plans to set up the commission by executive order after it failed to pass the Senate last week. But Republicans say it would merely give Democrats political cover to sign off on tax hikes, and their cooperation is in doubt.

Even if all goes according to plan, the White House still forecasts US public debt rising above 71% of GDP by 2013, up from 53% in 2009 -- levels that could spook investors and drive up the government's borrowing costs.

The flurry of hearings inspired a round of finger-pointing on Capitol Hill. Republicans blamed Democrats' aggressive spending measures to boost the economy, while Democrats said policies pursued by former Republican President George W. Bush -- cutting taxes while pursuing two wars and setting up a prescription-drug benefit -- were largely to blame.

“Saying that this is the responsibility of the (Obama) administration or the Democratic Congress is like a guy who ran up a credit card bill and left before the credit card bill arrived in the mailbox,” Orszag said. (Reuters)