President Obama on Thursday unveiled a $3.55 trillion budget for next year, part of a spending plan that sets aside billions for health care and the ailing financial industry and keeps the federal deficit north of $1 trillion.
The fiscal 2010 budget increases taxes on the wealthy but still forecasts a deficit of $1.2 trillion, though the president and his budget director Peter Orszag said the administration has identified $2 trillion in long-term reductions to keep with the president's pledge of halving the deficit by 2013.
But Obama said "we must add to our deficits in the short-term to provide immediate relief to families and get our economy moving."
In addition to next year's spending, Obama proposed more immediate changes that would push spending to $3.94 trillion in the current year. That would result in a record deficit Obama projects will hit $1.75 trillion, reflecting the massive spending being undertaken to battle a severe recession and the worst financial crisis in seven decades.
Obama and Orszag pledged to make big investments in energy, education and health care.
The fiscal 2010 budget sets aside a "reserve fund" of $634 billion as a "down payment" on the costs of universal health care coverage over 10 years.
The budget, while not specifically calling for additional bank bail out funds, also creates a budget allocation of $750 billion this year for the Treasury Department to purchase financial assets of struggling banks. This amount is $50 billion larger than the first bank bailout.
The administration say it has no current plans to request the extra money to prop up the banks, but if it does the $750 billion in rescue funding is expected to directly cost taxpayers about $250 billion. Under government accounting, funds used to purchase bank assets are not scored on a dollar-for-dollar basis.
The budget outline calls over 10 years for $637 billion in higher taxes on the estimated 5 percent of taxpayers with annual adjusted income of $250,000 or more. For taxpayers who earn less than that, the budget seeks $770 billion in tax cuts or tax refunds.
The president, who gave an overview of the fiscal 2010 budget Thursday morning, said he is beginning the long-term task of restoring fiscal discipline despite massive deficit spending he claims is necessary to kick-start the economy.
"There are some hard choices that lie ahead," Obama said. "We're going to go through our books, page-by-page, line-by-line to eliminate waste and inefficiency."
But Republican leaders criticized the proposed spending plan as a poor example of fiscal discipline.
"I agree with the president that we need to make some tough decisions regarding how we spend taxpayer dollars. Unfortunately, at this juncture, while the American people are tightening their belts, Washington seems to be taking its belt off," Senate Minority Leader Mitch McConnell said in a statement.
"This budget makes clear that the era of big government is back, and Democrats want you to pay for it," House Minority Leader John Boehner said in a statement.
The budget extends the middle class tax cuts passed by the Bush administration in 2001 and 2003, but lets cuts for the wealthy expire to help pay for his plan. Those cuts were due to expire at the end of 2010. If Congress approves Obama's recommendations, the Bush tax cuts would expire only for couples making more than $250,000 per year.
The president's reserve fund for health care covers roughly two-thirds of the anticipated 10-year cost of universal health care -- projected at $1 trillion.
The administration will work with Congress to locate the remaining funds to finance the plan. The White House contends by directly telling Congress how much universal health coverage is projected to cost, it can devote more time to debating the methods of achieving coverage instead of getting bogged down in conflicting cost estimates.
The $634 billion down payment on expanding health care coverage would come in part from a $318 billion increase over 10 years in taxes on the wealthy, defined as couples making more than $250,000 per year and individuals making more than $200,000. The tax increase would occur by reducing the benefit the wealthy get on tax deductions.
The other half of the down payment on Obama's drive toward universal health care -- $318 billion -- would come from curtailing payments to hospitals and insurance companies under Medicare and drug payments under Medicaid.
The cost of the stimulus bill and the increased bailout support would push the deficit for this year to $1.75 trillion, nearly four times last year's record $455 billion and a percentage of the economy -- just over 12 percent -- not seen since World War II. The deficit would remain near $1 trillion over the next two years before dropping to $581 billion in 2012 and $533 billion in 2013, the year that Obama has pledged to cut the deficit he inherited in half.
Obama's blueprint awards domestic agencies budget increases, on average, of 7 percent in 2010 over 2009 levels. The Pentagon would get a 4 percent boost, to $534 billion next year, but would then get increases of 2 percent or less over the next several years.
Obama also asked for an additional $75 billion to cover the costs of wars in Iraq and Afghanistan through September, the end of the current budget year. The administration will also ask for $130 billion for Iraq and Afghanistan in 2010 and will budget the costs of operations in Iraq and Afghanistan at $50 billion annually over the next several years.
The budget also imposes higher taxes on carbon through a "cap and trade" system that generates $645 billion over 10 years in new revenue by creating an auction among utilities and companies where they purchase pollution credits. These credits cover the "price" of the pollution each utility or company producers. Those who produce less pollution can sell them to companies that produce more.
Of the $645 billion the administration intends to raise in pollution taxes, the president sets aside $120 billion for federal subsidies to develop alternative energy sources. The remainder of energy taxes will finance the "make work pay" tax credit, a $400 per individual and $800 per couple refund of their payroll taxes.
Here are some highlights from the budget:
Tax increases -- The budget will impose the Clinton-era tax rates of 36 percent and 39.6 percent for couples earning more than $250,000 and individuals earning more than $200,000. (Current policy imposes a 33 percent rate on income from $200,000 to $357,000, and a 35 percent rate above $357,000. Those rates would jump to 36 percent and 39.6 percent, respectively). This change would generate $338 billion over 10 years.
The budget would also limit tax deductions for itemized deductions for families earning more than $250,000 and individual making more than $200,000. This would generate $179 billion over 10 years.
The plans would change capital gains tax rates to 20 percent, up from 15 percent, also for individuals above $200,000 and families above $250,000. This would generate $118 billion.
Business tax increases -- The budget imposes $353 billion over 10 years in "revenue changes and loophole closures." The plan includes at least 14 different tax increases.
Tax cuts -- The budget includes a tax credit that would provide a refund on payroll taxes of up to $400 per individual and $800 per family. This costs $536 billion over 10 years.It expands the earned income tax credit, costing $32 billion over 10 years. It expands the child tax credit, costing $70 billion over 10 years. It expands IRA and 401k credits, costing $55 billion over 10 years.
Business tax cuts -- The budget eliminates capital gains for small business, costing $7 billion over 10 years. It makes the research and experimentation tax credit permanent, costing $74 billion over 10 years.
FOX News' Major Garrett and The Associated Press contributed to this report.