Obama aims for a clearer budget

After eight years of budget practices that often camouflaged federal spending, President Obama is planning a new strategy of putting on the books as many costs as possible to demonstrate the extent of the nation’s economic troubles, senior White House officials say.

Obama’s first budget, scheduled to be released in broad outline Thursday, will include at the outset money for the Iraq war, the military buildup in Afghanistan and other expenditures. The approach is in contrast to that of the previous administration, which often tucked such costly commitments into separate spending requests that would go to Congress later.

“The president is determined to treat the American people as adults and be straight up about what we’re facing and what we need to do to move forward,” said David Axelrod, senior advisor to the president.

The new approach, which is likely to be set out in the president’s address to Congress tonight, follows up on Obama’s repeated campaign pledges to make government more transparent.

It also could make it easier for him to keep his promise to cut the federal deficit in half by the end of his first term. By starting with a huge deficit now, he could slash spending in his fourth year. By then, costs, such as stimulus spending, war appropriations and others, would likely be gone or sharply reduced.

For years, the White House and Congress have engaged in a kind of Kabuki theater around the federal deficit. The president would release a budget in February that would show declining deficits into the future. But that budget would exclude most war costs and use several unrealistic assumptions, including over-optimistic predictions of economic growth and rising federal revenue.

“There were significant costs that were excluded from the budget because the Bush administration pretended that certain policies that everyone knew would continue wouldn’t continue,” said Jim Horney, a budget expert with the nonpartisan Center on Budget and Policy Priorities.

One practice was including revenues from the alternative minimum tax in the projections. Congress passed the AMT four decades ago to prevent millionaires from escaping taxes. But because lawmakers neglected to index the income levels for inflation, the higher tax rate would now hit a large swath of middle-income taxpayers unless lawmakers pass AMT relief -- which they do every year.

But for budget reasons, the Bush administration continued to assume that the AMT would take effect in future years, raising tax revenue assumptions by nearly $1 trillion over 10 years.

Similarly, every year the Bush administration would issue an initial deficit projection that was much higher than other economists’ projections. That way, when the final deficit count was released, the administration could claim it had brought the deficit down.

Deficits accumulated each year that President Bush was in office, from $158 billion in fiscal 2002 to $455 billion last year, totaling roughly $2.5 trillion altogether.

The legacy of Bush’s federal deficits leaves Obama in a difficult position, in that he has to make deficits worse in the short term.

As he opened a fiscal summit with lawmakers and budget experts on Monday, the president emphasized the role that healthcare costs are playing in the deficit, calling it the “single most pressing long-term fiscal challenge we are facing, by far.”

In fact, by 2018, more than 51% of all healthcare spending in America will be done by federal, state and local government, totaling some $2.2 trillion, according to the latest estimates released today by the Centers for Medicare and Medicaid Services. In 2008, the government accounted for an estimated 46.6% of the nation’s healthcare spending, with the majority provided by consumers and private insurance companies.

For some lawmakers, the way to contain healthcare costs has nothing to do with Obama’s idea of reform.

“Looking ahead, we’re hearing from some people that we can’t reform government entitlement programs until we reform the entire healthcare system,” said Sen. Charles E. Grassley (R-Iowa), ranking member of the Senate Finance Committee.

“The problems with our healthcare system need fixing. But for a lot of people, healthcare reform is code for spending more, not less.”

As the president gears up to address Congress today and reveal his budget plans on Thursday, he will hark back to themes he sounded through the campaign, Axelrod said.

“He has talked about energy independence; he has talked about healthcare and bringing down the cost and making it more widely available; he has talked about education,” Axelrod said. “Those, in his mind, are the linchpins of a stronger economy and the signpost to a better future.”

He did not detail specifically how the president will pursue the downsizing of entitlement programs, but said, “You’ll see in the budget a commitment to cut and invest, to really attack the budget in a way that tries to free up room for our absolute priorities by cutting where we can.”

Particularly in the area of healthcare, Axelrod said, “If you’re not willing to tackle that mountain, then you’re not serious about budget reform.”

Before any of that can happen, though, the White House wants what it calls an “honest budgeting” process that accurately charts the scope of the challenge.

“We want a budget that, to the best of our ability, shows what we’re going to have to deal with over the next decade,” he said. “I don’t think that has been the practice in this town. The practice has been to sweep everything under the rug.”

Noam N. Levey in our Washington bureau contributed to this report.

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maura.reynolds@latimes.com