Painful cuts in $3.7 trillion budget

WASHINGTON (CNNMoney) -- President Obama on Monday unveiled a $3.7 trillion budget request for 2012 that proposes painful cuts in many government programs but fails to address the largest drivers of the country's long-term debt: Medicare, Medicaid and Social Security.

The budget, which is likely to face stiff resistance in Congress, takes a big bite out of domestic spending and would slash deficits by $1.1 trillion over the next decade, according to White House estimates.

Two-thirds of those deficit cuts would result from spending reductions, while a third would come from an increase in tax revenue, according to senior administration officials.

"I'm convinced that they only way we can make these investments in our future is if our government starts living within its means," Obama said.

And that means cuts to hundreds of domestic programs. For example, he is proposing to slash funding for the low income heating assistance program.

"It's a tough decision and we didn't make it lightly," White House budget director Jacob Lew told CNN's "American Morning" on Monday. "The program was never designed to meet all needs."

But even as it trims deficits, the president's budget would add $7.2 trillion to the debt held by the public between 2012 and 2021.

Obama's 2012 budget is sure to stoke the debate over how to get the government's fiscal house in order.

On the president's right, Republican lawmakers are calling for even deeper cuts and hankering for a fight now over 2011 spending. At the same time, many Democrats and liberal advocates are expected to lash into the administration for the depth of some of his proposed cuts.

Sen. Jeff Sessions of Alabama, the ranking member on the Senate Budget Committee, told "American Morning" the budget cuts are nowhere near deep enough to reduce the deficit or the interest payments on the debt.

He said the "$1 trillion reduction is insignificant and does not get us off on the right course. We are facing a fiscal crisis."

Strategic investments - and cutbacks: Broadly speaking, the president's request calls for a mix of spending proposals aimed at boosting U.S. competitiveness and belt-tightening intended as a "down payment" on serious deficit reduction.

In some cases, the added investment and belt-tightening happen in the same program.

For instance, Obama's budget wants to make permanent the recent increase in the level of Pell Grants to $5,500 a year to help 9 million students afford college and graduate school.

But to pay for that proposal, Obama would eliminate the grants for summer school and limit their use to the regular school year. He also proposed that interest on federal loans for graduate students start accruing during school; currently, the interest tab doesn't start running until after graduation.

Overall, Obama called for a five-year freeze on non-security discretionary spending, which the White House estimates will save more than $400 billion over 10 years.

Non-security domestic spending only makes up about 12% of all federal spending, and deficit hawks lament that both the White House and Republicans have focused all of their attention in this area rather than address the country's big debt drivers, which are spending on the entitlement programs and defense.

Half of all agencies will see funding reduced from 2010 levels, according to the administration. And altogether, there will be more than 200 terminations, savings and reductions of programs totaling $33 billion in the first year.

Among his proposals for strategic investments, Obama called for three green energy initiatives:

• 1 million electric cars on the road by 2015;
• a doubling of the share of electricity that comes from clean energy sources by 2035;
• and a 20% reduction in building energy use by 2020.

To help pay for these initiatives, the president called on Congress to eliminate 12 tax breaks for oil, gas and coal companies. The White House estimates those changes would raise $46 billion over a decade.

While the president's budget doesn't reduce the debt, it does start to stabilize annual deficits around 3% of the economy by the middle of the decade. That's the point where the country's annual spending doesn't add to the debt.

But high deficits will still accrue in the years after 2015 because of the interest owed on debt that has already accrued. For instance in 2017, the administration estimates there will be a $627 billion deficit -- all of which will be interest payments due.

And because the president's budget does not address how to curb the growth in entitlement spending, there is little chance it would stabilize deficits beyond the next 10 years.

"Total federal spending over the 10-year period will continue to grow well in excess of inflation, primarily due to the continued expansion of entitlement programs and other forms of mandatory spending," said David Walker, former Comptroller General of the United States.

A senior administration official described the 2012 budget request as a "firm foundation to take the next step."

On Social Security, a lightning-rod program that budget experts say faces serious longer-term problems, the president uses the budget to "lay out his principles" on how to strengthen the program in the future.

What could go wrong: Obama's budget request is essentially a blueprint of his fiscal priorities -- the programs he would like to fund or cut, the new investments he would make and how he would pay for it all.

But the request is just that -- a request. And it's one that Congress can accept, reject or modify.

Indeed, Republicans may well reject Obama's budget out of hand.

And some of his proposals are likely to be a tough sell politically. For instance, he wants to limit the value of itemized deductions for families making more than $250,000 a year. He has made the same proposal before, and it went nowhere.

What's new with this budget is the context. He calls for the money raised by limiting deductions to pay for protecting the middle class from the Alternative Minimum Tax for three years. Lawmakers pass so-called AMT patches regularly but rarely pay for them.

Even if Obama's budget is adopted wholesale -- which it won't be -- the estimates for deficit reduction may or may not pan out depending on how close to reality the administration's forecasts for unemployment, interest rates and economic growth prove to be.

In any case, Obama's 2012 budget is only the first step in a convoluted process that involves no less than 40 congressional committees, 24 subcommittees, countless hearings and a number of floor votes in the House and Senate.

If all goes well, a formal federal budget for government agencies will be in place by Oct. 1, the start of the 2012 fiscal year. Because Congress never passed a budget for fiscal year 2011, however, the government has been running on funding from a so-called continuing resolution, which expires on March 4.

CNNMoney staff writer Aaron Smith contributed to this report.