US President Barack Obama proposed a five-year freeze on some government spending and warned of painful cuts ahead on Tuesday in a centrist speech designed to prove he has fiscal discipline and can work with resurgent Republicans.
Obama sought in his State of Union speech to reassure Americans weary of stubbornly high 9,4% unemployment, fearful of rising debt, dismayed at vicious political rhetoric and worried that their country is falling behind economic powers like China and India.
“At stake is whether new jobs and industries take root in this country, or somewhere else. It’s whether the hard work and industry of our people is rewarded. It’s whether we sustain the leadership that has made America not just a place on a map but a light to the world,” Obama said.
Voters want Democrats and Republicans to govern with “shared responsibility” in tackling the huge deficit and energising growth. He offered a corporate tax cut and backed foreign trade deals as way to promote growth and appeal to his opponents as he positions himself for a 2012 re-election bid.
Obama called for a job-creating “Sputnik moment” fed by new spending in research and education like the 1950s space race unleashed when the Soviets launched the Sputnik satellite.
“Yes, the world has changed,” he said. “The competition for jobs is real. But this shouldn’t discourage us. It should challenge us.”
Challenges ahead
The challenge will be how he finances investment projects while addressing a dire fiscal outlook. On this Obama gave no hint, leaving details to his budget due in February.
It will be no easy task. The spending freeze would reduce the budget deficit by $400-billion over a decade, a pinprick against the country’s $1,4-trillion deficit this year and the $14-trillion national debt that Republicans vowed to slash.
Moreover, the freeze would not apply to big entitlement programmes — such as Social Security and Medicare — at the heart of America’s deficit problem.
Still, analysts praised the cautious start. University of Virginia political science professor Larry Sabato called Obama’s freeze proposal the “opening gambit” in a looming debate about spending and debt with the government expected to hit its legal debt limit in March.
Robert Tipp, chief investment strategist at Prudential Fixed Income, called it an important shift toward fiscal restraint that debt markets need to see. “It’s a big positive even with these baby steps toward that direction. At least he’s teeing up these issues,” he said.
The speech took place in a changed atmosphere on Capitol Hill. Republicans won control of the US House of Representatives and increased influence in the Senate after November congressional elections and Obama was forced to take account of that shellacking by emphasising areas where agreement might be possible.
But a civil tone was evident, with many Democrats and Republicans shaking hands and sitting together instead of in separate, competing blocs. It was a show of solidarity with Democratic Representative Gabrielle Giffords, who was shot in the head in a January 8 mass shooting in Arizona that wounded her and killed six. Many wore lapel ribbons to honour the victims.
Obama hopes his State of the Union speech will build his approval ratings, which are back over 50%, and help him recapture the magic seen in his 2008 election. He got a boost for his statesmanlike response to the Tucson killings and his surprise legislative successes after the bruising mid-term elections.
But Republicans wasted no time in saying that deeper cuts were needed. They say voters in November gave them increased power in order to roll back the size and scope of government. They have called for $100-billion this year in federal cuts.
“A few years ago, reducing spending was important,” US Representative Paul Ryan said in the Republican response to Obama. “Today, it’s imperative. Here’s why: We face a crushing burden of debt.”
But Obama said to cut spending, as Republicans want, in research and education would be “like lightening an overloaded airplane by removing its engine.”
“It may feel like you’re flying high at first, but it won’t take long before you’ll feel the impact,” he said.
Discretionary spending, excluding money for security, makes up just 13% of the $3,7-trillion US budget.
Obama proposals
Obama earned the warmest applause, bringing lawmakers to their feet, in the 61-minute address when he said it was time to get the US fiscal house in order.
He called for closing tax loopholes and using the savings to lower the corporate tax rate for the first time in 25 years. Republicans want a lower corporate tax rate but may not be willing to close tax loopholes.
He vowed to pursue trade deals with Panama and Colombia similar to a recently concluded pact with South Korea, a move likely to be welcomed by trade-friendly Republicans.
But in a proposal Republicans could be expected to fight, Obama backed an end to tax subsidies for oil companies to help pay for clean energy innovation.
He set a goal of having 80% of US electricity production to come from clean energy sources, nuclear, solar, wind and “clean coal”, by 2035.
Drawing another battle line, Obama made clear he opposed permanently extending tax cuts for wealthiest Americans in the top 2% of income after agreeing to a two-year extension in a December tax-cut compromise with Republicans.
Republicans welcomed the more centrist tone.
“Overall it sounds to me like the president’s changed the tone and the rhetoric from the first two years,” said Senate Republican leader Mitch McConnell. “And I think that’s an appropriate adjustment in the wake of last year’s election.” – Reuters