Barack Obama proposes spending cuts, higher tax for smokers in $3.8 trillion Budget

Mixing modest curbs on spending with tax increases reviled by Republicans, US President Barack Obama proposed a $3.8 trillion budget on Wednesday that would raise taxes on smokers and wealthy Americans and trim Social Security benefits for millions.

Obama's 2014 blueprint combines a $242 billion infusion of new spending for road and rail projects, early education and jobs initiatives - all favored by Democrats - with longer-term savings from programs, including Medicare and the military. It promises at least a start in cutting huge annual federal deficits.

The president pitched his plan as a good-faith offer to his GOP rivals since it incorporates a proposal he made to Republicans in December that wasn't radically different from a GOP plan drafted by House Speaker John Boehner. But it follows January's bitterly fought 10-year, $600 billion-plus tax increase that has stiffened GOP resolve against further tax hikes.

"I have already met Republicans more than halfway, so in the coming days and weeks I hope that Republicans will come forward and demonstrate that they're really as serious about the deficit and debt as they claim to be," Obama said.

He was having a dozen Senate Republicans to the White House for dinner on Wednesday evening in hopes of building a dialogue on the budget and other topics.

After four years of trillion-dollar-plus deficits in his first term, Obama's plan projects a $973 billion deficit for the current budget year and red ink of $744 billion for the 2014 fiscal year starting in October. By 2016, the deficit is seen as dropping below 3 per cent of the size of the economy, a level that many economists say is manageable.

Obama cast his budget as a compromise offer that would bridge differences between Republicans and their desire for reducing government spending and Democrats who want more revenue from taxpayers. But it's difficult to overstate the gulf between Obama and the conservatives who are in the GOP driver's seat in Congress.

While the budget proposal will not prompt any immediate congressional action, it will probably surface this summer when Republicans are expected to demand additional reductions in the deficit in exchange for increasing the nation's borrowing authority.

Obama claims $1.8 trillion in deficit savings over the coming decade, but the budget tables show the savings are actually $1.4 trillion. And $1.2 trillion of that is devoted to reversing automatic, across-the-board spending cuts required because of Washington's inability to follow up a 2011 budget pact with further deficit action.

"This is worse than a status quo budget," said House Budget Committee Chairman Paul Ryan, R-Wis. He said it has about $1 trillion in new taxes, $1 trillion in new spending with deficit reduction of only $119 billion over 10 years under GOP math that sorts through questionable interpretations employed by the White House.

For instance, Obama claims $167 billion in lower war costs - money the administration never intended to spend - and uses that "savings" for road projects and other undertakings it bills as jobs initiatives.

The real cuts include $400 billion scrubbed from health care programs like Medicare over the coming decade, including cuts in payments to drug companies and higher Medicare premiums for people who are better off.

The administration would modestly cut the annual operating budgets for both the Pentagon and domestic agencies while reprising ideas like higher Transportation Security Administration fees on airline tickets, the end of Saturday mail delivery and higher pension contributions for federal workers.

The White House budget claims $580 billion in tax increases on the wealthy over 10 years, including a 28 per cent cap on itemized deductions that's never gotten anywhere on Capitol Hill.

The total climbs closer to $1 trillion in tax increases after adding in ideas like a 94 cents-per-pack increase in taxes on cigarettes, changes for corporate foreign earnings, slower inflation adjustments to income tax brackets, elimination of oil and gas production subsidies, an increase in the estate tax, a new "financial crisis responsibility" fee on banks and new taxes on trading of exotic financial instruments known as derivatives.

Republicans predictably slammed Obama's plan for its tax increases, while his Democratic allies generally held their tongues over cuts to Social Security benefits.