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President’s 12-year plan to reduce budget deficit includes curbs on defence spending and Medicare reforms Barack Obama has set the stage for a new and bigger budget showdown with the Republicans, proposing a staggering $4 trillion (£2.4tn) in spending cuts over the next 12 years aimed at reducing America’s runaway deficit. Although the cut is enormous, it still falls well short of the $6.2tn the Republicans are demanding. The battle is set to dwarf last week’s 2012 budget row that came within an hour of seeing the federal government shut down. The size of the deficit, more than $14tn, is one of the biggest political issues in the US, especially with the country in hock to China, which has accumulated a horde of dollars. The deficit was one of the main reasons for the rise of the Tea Party movement and contributed to the Republican victory in last November’s congressional elections. Obama has proposed to tackle the deficit by curbing defence spending and ending tax breaks introduced by George W Bush for wealthy Americans – those earning more than $250,000 a year. In a move that will anger the Democratic base, Obama is also suggesting further cuts in the deficit would come from reforms to Medicaid, which provides basic health provision for the poor, and Medicare, which provides health care for those over 65. The president, who set out his proposals in a speech at George Washington University in DC, blamed Bush for the deficit. He said it has been known for decades that the baby boomers reaching retirement age would put a strain on health and social security at this time. Bill Clinton had left a balanced budget and the burgeoning deficit had been a consequence of the Bush era, Obama said. “We increased spending dramatically for two wars and an expensive prescription drug programme, but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts: tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500bn every year over the next decade,” Obama said. He added: “Even after our economy recovers, our government will still be on track to spend more money than it takes in throughout this decade and beyond. That means we’ll have to keep borrowing more from countries like China. And that means more of your tax dollars will go toward paying off the interest on all the loans we keep taking out. By the end of this decade, the interest we owe on our debt could rise to nearly $1tn.” The Republicans, after meeting Obama at the White House , said they are opposed to ending the Bush tax breaks. They also want deep cuts in Medicaid and Medicare. “It is time to act,” said the Senate Republican leader Mitch McConnell. “We don’t believe a lack of revenue is part of the problem, so we will not be discussing raising taxes.” The vice-president, Joe Biden, is to begin regular meetings with Republican and Democrat congressional leaders next month and Obama said the aim was to reach a final agreement on a plan to reduce the deficit by the end of June. The focal point in the next few weeks is the raising of the country’s debt limit above $14.3tn. Normally this would be a technical move that would be voted through without much bother but it has become entangled in the battle over spending. If this is not agreed by the Republicans, the country would be temporarily bankrupt, whoch would be embarrasing for Obama and would have implications for economies round the world. The deadline is 16 May. Republican leaders said that if Obama did not agree to major debt cuts, they would not vote through the rise in in the debt ceiling from $14.3tn. The Republicans, who have a majority in the House of Representatives, are scheduled to pass a bill later this week to cut $6.2tn over the next decade without raising taxes. But it has no chance of getting through the Senate, where the Democrats have a majority. Even if it did, Obama could use his presidential veto to block it. The battle over the deficit has consequences not only for the US as it stumbles out of recession but other economies round the world. Democrats warn that the spending cuts being advocated by the Republicans would send the country back into recession. The fight last week was over the remaining six months of this year’s budget and involved only $38bn in cuts compared to the trillions at stake over the coming weeks and months. Obama’s problems are not confined to the Republicans. Many Democrats in Congress and outside, mainly the volunteers who helped get him elected in 2008, object even to the $4tn in spending cuts, and any cuts to Medicare and Medicaid. Two left-wing groups that campaigned for him last time are threatening to withhold funds next year. Some economists and political scientists also raise what they see as the danger of Republican cuts slowing or even reversing America’s climb out off recession. Thomas Ferguson, professor of politics at the University of Massachusetts, said there was a danger of repeating the mistakes of the Great Depression by chopping spending. “The US would surely take a rather large plunge. They will get Ireland and Greece outcomes. You will crater the US economy if you were to enact the [Republican] bill,” Ferguson said. US domestic policy Obama administration US economy US taxation Democrats Republicans US healthcare US politics United States Ewen MacAskill guardian.co.uk