US unveils budget plan based on ′modest growth′ | Business| Economy and finance news from a German perspective | DW | 09.02.2016
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US unveils budget plan based on 'modest growth'

The US administration expects only modest growth for the nation's economy over the next two years, restrained by global economic weakness, according to the 2017 budget proposal unveiled by President Barack Obama.

In its budget proposal for fiscal 2017, which would take effect on Oct. 1 this year, the Obama administration foresees state spending of $4.15 trillion (3.66 trillion euros), with projected growth rates of 2.6 percent this year and around the same pace in 2017.

Unveiling the draft in Washington on Tuesday, the White House also said it expected steadily increasing budget deficits, after several years of reduction.

Stressing that the US economy was currently "the strongest, most durable economy in the world," the White House noted, however, that growth would remain only moderate "due in part to the special nature of the most recent recession," which had left many households and businesses "still struggling to bring down debt burdens."

Moreover, weak growth in Europe and most emerging economies was also likely to affect the US economy over the next few years, the Obama administration said.

Call for higher taxes

Obama's budget foresees a rise in government expenditure of about 5 percent over the current fiscal year, with a state deficit holding steady at about 3.3 percent of gross domestic product (GDP) through 2018. From then on, however, the deficit is projected to rise toward an "unsustainable" 5 percent by 2026, unless reforms on taxes and spending are implemented.

Rising costs from social security retirement payments and health care would add to the fiscal shortfall.

But the White House added that the deficit could be held below 3 percent "without hurting the economy with hefty cutbacks," if tax loopholes and special breaks for the wealthy would be cut, business and capital gains taxes reformed, and a $10-a-barrel tax on crude oil introduced.

"That means ending the harmful spending cuts known as sequestration, which limit the ability to invest in the building blocks of long-term economic growth, like research and development, infrastructure, job training, and education," the administration said.

The "sequester" automatic spending reductions were agreed in 2013 amid a grinding battle over the government's finances between Democrats and Republicans.

Too upbeat on growth prospects?

Even though Washington lowered its 2017 growth forecast compared to an estimate a year ago, analysts believe Obama's budget plan includes higher medium-term growth than projected by other government agencies.

According to the administration, the US economy is expected to grow at an average rate of 2.3 percent over the next decade. The non-partisan Congressional Budget Office (CBO), however, has cut its view to below 2.2 percent, and the US Federal Reserve even sees it slipping to a range between 1.8 percent and 2.2 percent.

As a result, the White House's view that the national debt would stay at around 75 percent of GDP through 2026 would become obsolete, the CBO said, as it sees debt on an upward path, hitting 86 percent in 2026.

uhe/cjc (Reuters, AFP)

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