Obama, Republicans face budget battle after Union address

Reuters , Wednesday 26 Jan 2011

In Tuesday's State of the Union address, President Obama sought to unite Democrats and Republicans and positively confront America's rising economic rivals

US President Barack Obama delivers his State of the Union address on Capitol Hill in Washington 25 January 2011. (Reuters)

President Barack Obama and Republicans are headed for a fight over deficit reduction and spending cuts despite the president's efforts to set a conciliatory tone in his State of the Union speech on Tuesday.

Obama, with an eye on his 2012 re-election bid, used his speech to further a move to the political centre that he was forced to make after Republicans routed Democrats in congressional elections in November.

Obama offered some potentially appealing proposals to Republicans -- a corporate tax cut, a retooling of the tax code and an end to pet spending projects relied on by many lawmakers.

In a bid to show he has fiscal discipline, he proposed a five-year freeze in some domestic spending, which he said would cut $400 billion from budget deficits over a decade, a move applauded by US debt and stock traders.

To Republican calls for even deeper cuts, Obama said, "Let's make sure what we're cutting is really excess weight."

Republicans seeking $100 billion in cuts this year called Obama's plan too little, too late.

"A partial freeze is inadequate at a time when we're borrowing 41 cents of every dollar we spend, and the administration is begging for another increase in the debt limit," said House of Representatives Speaker John Boehner.

"There's got to be some kind of absolute iron-clad path to getting (spending) down," Republican Senator John McCain said on ABC's "Good Morning America" programme on Wednesday.

Obama sought in his speech to reassure Americans weary of stubbornly high 9.4 per cent 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.

Obama said the economy is growing again but more needs to be done. He 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."

The president heads to Wisconsin on Wednesday to drive home his message of innovation and job creation, visiting a renewable energy technology.

The challenge will be how he finances investment projects for future growth 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 do little to alter the country's fiscal path -- a $1.4 trillion deficit this year and the $14 trillion national debt that Republicans vowed to slash.

Moreover, the freeze would not apply to the big entitlement programmes -- such as Social Security and Medicare -- at the heart of America's deficit problem.

Still, analysts praised the cautious start.

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.
Americans recognized the difficulty in finding a compromise.

Michelle Sharron, 47, a writer in the software industry in San Francisco, said: "This is definitely a lesson in compromise, but I think it is the hard reality of getting things done. Outrage is easy. Compromise is hard."

The speech took place in a changed atmosphere on Capitol Hill. Resurgent Republicans enjoy increased power in Congress after November congressional elections and Obama was forced to take account of that by emphasising areas of agreement.

But a civil tone was evident, with many Democrats and Republicans shaking hands and sitting together instead of in separate blocs. It was a show of solidarity with Democratic Representative Gabrielle Giffords, who was shot in the head in an 8 January mass shooting in Arizona that wounded her and killed six others. Many wore lapel ribbons to honour the victims.

Obama hopes his State of the Union speech will build his approval ratings, which got a boost from his statesmanlike response to the Tucson killings and his surprise legislative successes after the bruising mid-term elections.

Obama earned warm applause 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 per cent 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 per cent of income after agreeing to a two-year extension in a December tax-cut compromise with Republicans.

Republicans welcomed the more centrist tone.

"There are certainly some things we can work together on," House Republican Leader Eric Cantor said on CBS's "The Early Show" on Wednesday.

"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."

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