Obama's 2010 budget deficit soars to record $1.56 trillion

WASHINGTON (Reuters) - President Barack Obama on Monday projected the budget deficit would peak at a fresh record in 2010 before easing, as he sought to balance fiscal responsibility with battling double-digit unemployment.

Dubbed an old-style liberal tax-and-spender by his Republican opponents, Obama is under pressure to convince investors and big creditors like China that he has a credible plan to control the country's deficit and debt over time.

"We won't be able to bring down this deficit overnight, given that the recovery is still taking hold," Obama said, laying out $3.8 trillion in spending plans for the fiscal year to September 30, 2011.

"We will continue, for example, to do what it takes to create jobs. That is reflected in my budget. It is essential," he said in a televised statement from the White House.

His blueprint, subject to change by the U.S. Congress, forecast a $1.56 trillion deficit in 2010, or 10.6 percent of the economy measured by gross domestic product (GDP).

The rise was partly due to the $787 billion stimulus package Obama pushed through Congress early last year to fight the recession. Obama, a Democrat, pinned the financial mess firmly on his Republican predecessor President George W. Bush.

Republicans ignored this effort to deflect blame and seized on the grim fiscal forecast to criticize Obama's handling of the economy.

Senator Judd Gregg, the top Republican on the Senate Budget Committee, warned the country was sinking into a "quagmire" of debt and said Obama's stimulus plan had failed to create jobs.

"These circumstances call for a bold, game-changing budget that will turn things around, put in place a plan to restrain spending, reduce the debt and tackle the big entitlement programs that are growing out-of-control," he said. "Instead, the president has sent us more of the same."

While maintaining policies this year aimed at protecting a still fragile economic recovery, with $100 billion earmarked for measures to create jobs, Obama plans to save money from 2011 by curbing 120 projects, including a powerfully symbolic space mission to return to the moon, but will invest more in education and research.

HEALTHY SKEPTICISM

Market reaction was muted and analysts surveyed the numbers with a healthy dose of skepticism.

"I don't think there is anything out there that is job creating and I don't have much confidence that some of the spending cuts will actually happen," said Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York.

Although Obama submits the budget to Congress, actual decisions about how the government raises and spends money are made on Capitol Hill in a process that usually lasts most of the year.

Polls show voters are worried by the weak condition of U.S. finances, and Obama plans to create a bipartisan fiscal commission to figure out options on taxes and spending.

The increase in the 2010 deficit compared with a $1.41 trillion shortfall in 2009 that equaled 9.9 percent of GDP.

But this funding gap was forecast to dip to $1.27 trillion in 2011 -- 8.3 percent of GDP and roughly a third of total government spending that year forecast at $3.8 trillion.

However, the deficit was projected to fall to roughly half that as a share of the economy in the final year of Obama's term in 2012, meeting a key pledge.

Much of the improvement in the fiscal picture is driven by underlying forecasts adopted in the budget for solid economic growth, yielding higher tax revenue. The economy is forecast to expand by 2.7 percent in 2010, 3.8 percent in 2011 and above 4 percent for the next 3 years.

The budget also assumes unemployment will remain high, edging to 8.2 percent in 2012 from 10 percent this year, while inflation stays mild and interest rates rise only slightly.

Discontent over the jobless rate translated into political defeat for Obama's Democrats in an election last month for the U.S. Senate in Massachusetts, costing the Democrats a crucial Senate seat and foreshadowing potentially big losses for the party in congressional elections in November.

The budget plan reflects a struggle to bolster the economy and create jobs while tightening the government's belt to reduce the deficit. All are concerns of voters who will elect all 435 members in the House of Representatives and more than a third of the 100 Senate members in the November elections.

To boost jobs, Obama is setting aside $100 billion in 2010 in tax credits aimed at small businesses as well as investments in clean energy and infrastructure, before starting to tighten the country's fiscal belt the following year.

Economists say withdrawing policies aimed at boosting growth too soon helped prolong the Great Depression in the 1930s. Obama is determined to avoid repeating that mistake. But he must also ensure that investors don't lose confidence in the U.S. ability to put its fiscal house in order.