Page last updated at 23:02 GMT, Wednesday, 29 April 2009 00:02 UK

Obama's grand economic ambitions

Analysis
By Steve Schifferes
Economics reporter, BBC News

Barack Obama answers questions from the press on 5 January
President Obama faces a projected budget deficit of $1.7 trillion this year

Tackling the economic crisis has been the centrepiece of President Obama's first 100 days in office.

It is not yet clear whether the $787bn (£502bn) stimulus package or the $1 trillion bank bailout plan will succeed in stemming the sharp fall in the US economy.

But it is already clear that President Obama has even bigger economic ambitions.

Unlike the Bush administration, he sees a central role for the government in transforming the US economy and ultimately rebuilding US power and prestige in the world.

He has already signalled that despite the current economic problems, he wants to reform the US healthcare system, improve access and standards in education, and introduce green technology.

'Unsustainable'

But all these measures could be expensive, and his biggest challenge is reconciling his bold ambitions with reducing the huge budget deficit, projected to reach $1.7tn this year, 12% of GDP.

US fiscal policy is on an unsustainable course
Douglas Elmendorf
Congressional Budget Office director

The president has recognised the need to bring the budget back into balance in the long term, after the economy begins to revive, but he has been vague about the details of how to do so.

The federal budget will face additional pressures in the next decade as the baby boomer generation begins to retire, adding to social security and Medicare costs.

The Congressional Budget Office estimates that by the end of the president's first term in office, the deficit will still be over $500bn.

"US fiscal policy is on an unsustainable course," says CBO director Douglas Elmendorf.

Already some fiscally conservative congressional Democrats, known as blue dogs, are expressing doubts that all of his spending plans are affordable. Together with the Republicans, they could have the power to block his plans.

The key battle is likely to be over healthcare reform, the most difficult economic and political challenge President Obama faces.

The rising cost of healthcare, which could reach $4tn within the next five years, or 20% of GDP, is threatening the government's budget balance and the competitiveness of US companies alike.

Half of total healthcare spending is by the federal government and the other half by companies who provide health insurance for their workers.

Health costs

Health costs are increasing at 5% a year above the rate of growth of the economy, a pace which is clearly unsustainable.

Healthcare activists rally in Los Angeles, April 2009
Nurses call for universal healthcare at a rally in Los Angeles

At the same time, President Obama is committed to bringing the 15% of the population which lacks any health insurance - around 45 million people - back into the system.

Earlier estimates suggested that his plan could cost up to $200bn per year, and the president has allocated a healthcare reserve fund in his budget proposals that will grow to $646bn.

Some of this is to be paid by eliminating tax breaks for higher-income earners that were introduced by the Bush administration.

But it is very likely that Americans will have to get used to a less generous healthcare system, with more controls over what doctors and hospitals can spend.

During the election, President Obama signalled that he would retain the basic structure of the US healthcare system, with employer-based insurance for those in work, but extend coverage by offering uninsured workers a version of the federal health plans offered to government employees.

However, the healthcare industry, a big and powerful lobby in Washington, is now organising against this part of the proposal, with the support of the Republicans.

Key challenges

Apart from the costly healthcare reforms, President Obama also has potentially expensive plans to improve access to education, and there is an urgent need to rebuild broken physical infrastructure.

Rescuers at the collapsed Interstate 35W bridge in Minneapolis
The budget includes funds to rebuild crumbling infrastructure

The Obama administration is hoping that some of the costs of his programmes can be met by a key element in his plans to reduce climate change - carbon trading.

By charging companies who pollute, but allowing them to trade permits for carbon emissions, he is hoping to raise hundreds of billions of dollars in additional revenue.

But the experience of the EU carbon trading scheme suggests that there is a great deal of uncertainty in their design, and they may be manipulated by industry in the early stages.

The president's ambitious agenda faces three key challenges.

First, if the economic recovery is significantly delayed, he may find that he does not have either the political or economic resources to pursue his bigger programme objectives.

Secondly, many observers believe that the new president is being too ambitious, and should be concentrating his energies on just a limited number of key policies.

"Success depends as well on Obama's ability to manage his agenda, as it does for every president determined to make more than incremental change," says Brookings Institution scholar William Galston.

New paradigm

But his biggest problem may be the reluctance of the US public to trust government to solve their problems.

The US electorate, despite the credit crunch, still appears to fear big government more than big business, according to recent polls.

Nearly half (48%) would rather have fewer services and smaller government, with 40% wanting bigger government, the latest Pew poll found.

"The public disposition has always been to be sceptical about big government," said Andrew Kohut, director of the Pew Research Centre.

Mr Obama appears to want to forge a new paradigm between citizens and government, in which the government engages as enabler and guarantor of key services such as health and education.

For his critics on the left, he has not done enough to challenge the failed institutions of capitalism, especially the banking system, instead propping them up with temporary relief measures.

For those on the right, he is building the road towards a socialist, European-style welfare state.

US budget deficit



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