Obama willingness to get specific in SOTU on long term fiscal challenges in doubt

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The unemployment rate and the nation’s increasingly precarious fiscal position – its enormous budget deficits and its ballooning debt – will be the dual points of emphasis in President Obama’s second State of the Union address on Tuesday.

But the president is limited in what he can do to make the doddering economic recovery move any faster. Many in Washington will be looking most closely for what specific steps President Obama proposes to deal with the deficit and debt. And unlike past years, there is a broadly shared feeling that he should offer up real, substantive and even somewhat politically risky proposals.

There are several directions he could go in. But interviews with several close observers of the issue yielded one thing they said he must do above all: make a compelling case to the American people that painful and unpalatable measures to put the nation’s books in order are necessary, and that all Americans will be negatively affected by such actions in the years ahead.

“He has to prepare the country for the kinds of tough choices that are required to stabilize the debt,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

Explaining the situation and the stakes is one part of this. Many Americans hear lip service paid to the deficit and national debt, but many casual observers probably do not know the difference between the gap left when government revenues do not match up to spending ($1.3 trillion) and the amount of money borrowed from creditors and still owed back to them ($14 trillion).

Far more complicated is the risk in the next few years of a credit crisis similar to that of those in Greece and Ireland. The possibility of the federal budget being eaten up by entitlement spending and interest on the debt over the next decade or two adds yet another level of difficulty.

“There may well be US public debt tremors this year, both during federal debate over raising the debt ceiling and with at least a limited number of crises in local and city governments. The bigger problem, though, lies beyond 2011, as the unsustainability of the federal government’s fiscal trajectory becomes increasingly clear,” said Peter Orszag, Obama’s former White House budget director, in an op-ed published online by the Financial Times late Thursday night.

“I hope it does not ultimately require a crisis to restore fiscal sustainability at the federal level, but I fear it will,” Orszag said, in one of the more ominous pronouncements by a prominent economic official to date.

Whether Obama goes into specifics about what to do is another matter. There has been some expectation that Obama cannot give another speech that pays lip service to the need for fiscal reforms but does nothing to put his own neck out in favor of definitive steps.

“If he punts … that will be viewed as a real abdication of responsibility,” said James Capretta, a former senior budget official in the Bush administration now at the conservative Ethics and Public Policy Center.

But Republicans in Congress waited until this week to start putting out specific proposals on cutting spending, likely in an attempt to avoid giving Democrats too much time to attack them in the weeks leading up to the State of the Union.

On Thursday, Rep. Jim Jordan of Ohio and Sen. Jim DeMint of South Carolina announced a plan to cut $2.5 trillion over 10 years.

And on Tuesday, Republicans will debate on the House floor – in the hours leading up to Obama’s address – a resolution voicing support for the cuts they promised in September, back to 2008 levels of non-defense discretionary spending for the remainder of the fiscal year. The cuts amount to roughly $50 billion in spending.

It is possible that Obama will continue the game of cat and mouse with the GOP and give out only a few spare details on what he intends to do to cut spending, increase taxes, or reform entitlements. He will have to get very specific very soon anyway, when he releases his budget proposal for the 2012 fiscal year in just over three weeks.

But one of his own past top economic advisers, former Council of Economic Advisers Chairman Christina Romer, advised the president to include the nitty gritty in his speech Tuesday on the big stage.

“My hope is that the centerpiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit,” Romer wrote in the New York Times. “I am not talking about two paragraphs lamenting the problem and vowing to fix it. I am looking for pages and pages of concrete proposals that the administration is ready to fight for.”

Others are pessimistic that the president will give many details at all, especially on how to reform Social Security, Medicare and Medicaid.

“I very much hope I’m wrong but I think we will not see an attack on the real long run problem,” said Rudy Penner, former director of the Congressional Budget Office in the mid-1980’s and now a fellow at the Urban Institute.

“I think you will see proposals for cutting discretionary spending. Those will help a little. But there won’t be a comprehensive attack on the long run problem, which is so focused on social security and health,” Penner said. “It’s perceived to be too politically difficult.”

The subject area Obama is most likely to tackle is tax reform. News reports described the White House earlier this month as torn over whether to include a robust plan to overhaul the tax code, but if deep spending cuts are off the table for now in the president’s mind, and he does not want to touch entitlements yet for political reasons, tax reform is the only big ticket left.

“I think he will endorse the idea of tax reform,” Rep. Chris Van Hollen, a Maryland Democrat who is the ranking member on the House Budget Committee, said in an interview Thursday.

Treasury Secretary Tim Geithner on Friday will “host a discussion at Treasury with a group of thought leaders from academia, think tanks, industry associations and other stakeholders about corporate tax reform and incentives to invest in America,” the Treasury Department announced Thursday as “one in a series of discussions that senior Treasury officials are holding on this topic.”

Republicans have voiced support for tax reform. House Ways and Means Committee Chairman Dave Camp, Michigan Republican, said Thursday he was willing to eliminate loopholes for “congressionally blessed” businesses. And the U.S. Chamber of Commerce is also on board with the idea, even though its chairman, Thomas Bell, said that many businesses “have their own specific tax accoutrements that they love and want to hang on to.”

President Obama’s deficit commission estimated that the government loses $1.1 trillion a year in tax revenue due to tax loopholes, and proposed eliminating most or all of them, in conjunction with lowering the corporate tax rate to 26 percent from its current level of 35 percent. There are also many tax deductions and loopholes for individuals, such as the child tax credit and the home mortgage deduction.

The deficit commission recommended getting rid of most or all of those as well, in conjunction with drastically lowering income tax rates to as low as 8 percent, 14 percent and 23 percent, from their current levels, which range from 10 percent to 35 percent.

If Obama were to get behind any similar proposals, there would be ample debate and discussion over tax reform. But most political insiders believe even tax reform is too tough to accomplish in the next two years before the presidential election, because both sides will be too cautious in trying to avoid making politically costly blunders.

The battle then may be over how much spending to cut in the remainder of the current fiscal year and beyond.

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