Obama's First Budget to Pledge $1tn Deficit Will Be Halved in Four Years

Barack Obama is to deliver his first budget on Thursday with an ambitious pledge to halve the more than $1tn national deficit within four years in spite of having embarked on the biggest US spending spree since the 1930s.

The reaction, particularly from Republicans, was extreme skepticism, amid gloom that the recession is going to be much longer than Obama is counting on.

The US president is gambling on getting the deficit down through savings from several sources, including billions from a US pullout from Iraq and phasing out by 2011 George Bush's tax cuts for those earning over $250,000 (£175,000) a year.

Obama inherited a deficit of $1.2bn from Bush and calculates it will rise to $1.5tn before coming down to $533bn in 2013.

But that projection could be upset by a number of events, such as money saved in Iraq having to be spent on increased military involvement in Afghanistan or the failure of his $787bn economic stimulus package, which might require further bursts of spending.

Obama is to hold a White House summit on the deficit today and devote much of a speech to Congress tomorrow - effectively a state of the union address - to the economy before offering his budget.

In his weekly radio address on Saturday, he said: "We can't generate sustained growth without getting our deficits under control." He added that the budget would be "sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don't, and restoring fiscal discipline."

The secretary of state, Hillary Clinton, yesterday underlined the fragility of the US economy, its knock-on effects for the rest of the world and the extent to which it is now at the mercy of other governments, especially the Chinese.

At the end of her Asian tour, her first in her new role, she hammered home the need for China and the US to work together. She praised Beijing's continued investment in the US, warning it "would not be in China's interest" if the American economy continued to stall.

Thanks to its huge trade surplus, China has the world's largest foreign currency reserves - around $1.95tn - and is the largest holder of US government bonds.

"The Chinese government and central bank are making a smart decision by continuing to invest in treasury bonds," the secretary of state told Dragon TV.

Beijing has no interest in prompting a sharp fall in the dollar, which would devalue its existing holdings, and hit its struggling export sector harder.

Few Republicans share Obama's optimism about an early turnaround and are braced for the possible nationalization of two major banks, Citibank and Bank of America, an option that has not been ruled out. Obama administration officials are to be questioned about possible nationalization at congressional hearings this week.

Republican members of Congress, already gearing up for mid-term elections in November next year where they hope to reverse Democratic gains, have made the economy a political issue by almost unanimously refusing to vote for the stimulus package. Republican governors, appearing on US talk shows yesterday, said that they would not accept a small proportion of the money in the stimulus package earmarked for their states.

Haley Barbour, the governor of Mississippi, said: "There is some [stimulus money] we will not take in Mississippi." He claimed that when money in the stimulus package to help with unemployment benefit ran out, the states would then have to find it.

Bobby Jindall, the governor of Louisiana and a potential Republican candidate for the presidency in 2012, also said he would not accept parts of it: "It would be like spending a dollar to make a dime. I just have a fundamental disagreement with this package."

But the California governor, Arnold Schwarzenegger, said on ABC's This Week that he would gladly take all the money.