By Andy Sullivan
WASHINGTON (Reuters) - President Barack Obama starts his second term in office facing unprecedented budget constraints that will challenge his ability to implement his economic vision.
Spending caps that Obama signed into law in 2011 will make it difficult to boost investment in education, scientific research, transportation and other areas that he says will help the country retool for heightened global competition and rapid technological change, budget experts say.
Because those caps won't keep pace with inflation and population growth, the government will effectively have 16 percent less to spend in these areas by the time Obama leaves office in 2017, according to White House estimates.
That could constrain college loans, preschool education, job training and other programs that Obama says will boost national competitiveness.
"Under the caps as they are currently constructed, we're going to see pretty significant diminishment of investment in all of those things," said Scott Lilly, who spent decades writing spending bills as a Democratic staffer in the House of Representatives.
Since taking office in 2009, Obama has tried to balance his belief in an active government with concerns that the nation's finances are on an unsustainable course.
Even as he has pushed through more than $1 trillion in spending increases and tax cuts to fight the deepest recession in 80 years, he has floated deficit-reduction plans that would trim costs over the medium term.
As part of a deal that allowed the government to avert a first-ever debt default in August 2011, Obama and his Republican adversaries agreed to spending limits that would slow government spending growth by $1 trillion over 10 years.
Those caps in the 2011 Budget Control Act do not apply to popular benefits like the Social Security retirement program and Medicare, the health plan for retirees. Obama and fellow Democrats have so far blocked Republican proposals to scale back these programs, which are projected to grow at the same rate as the economy for the next four years before expanding as aging "baby boomers" drive up costs.
INCREASING ECONOMIC MOBILITY
Instead, the caps cover the 36 percent of government spending that is set annually by Congress. Known as discretionary spending, this category covers everything from the Defense Department to the National Endowment for the Arts.
It also includes social programs that Obama allies say are crucial for his agenda of broadening opportunity and expanding the middle class.
"If you were looking into all the corners of the budget to find those programs that helped to promote the economic mobility of disadvantaged people, many, if not most, would be there," said Jared Bernstein, a former economic adviser to Vice President Joe Biden.
The White House estimates that nonmilitary discretionary spending will shrink from 4.3 percent of the economy in the fiscal year that ended on September 30, 2011 to 2.8 percent when he leaves office in January 2017. That would be the lowest level since the government began keeping track in 1962.
An automatic cut due to take effect in March, known as the "sequester," will slash discretionary spending another 8 percent unless Democrats and Republicans agree on a way to head it off.
Obama frequently invokes the spending caps to rebut Republican charges that he does not care about reducing trillion-dollar deficits. He proposed another $100 billion in non-military discretionary cuts during his fiscal-cliff talks last month with Republican House of Representatives Speaker John Boehner.
But he also warns that deep program cuts will undermine future competitiveness. "The cuts we've already made ... mean that we spend less as a share of our economy than has been true for a generation," he said at a news conference on Monday. "And that's not a recipe for growth."
The White House says it will be able to work within the spending caps to prioritize the areas it cares about most.
But experts with experience in federal allocations say it will be exceedingly difficult to carve out room from other budget areas.
MORE PRISONS, MORE TAX EXAMINERS
The Census Bureau predicts the U.S. population will grow by 12.5 million over the coming four years. That will place increased demands on the government, requiring many agencies to boost staffing to avoid a performance downgrade, Lilly said.
The FBI, for example, will need more crime fighters, and the IRS will need more tax examiners. Increased highway traffic will degrade roads more quickly, and increased air traffic will require more air traffic controllers.
The Bureau of Prisons will face greater costs as it expects the federal inmate population to rise 8 percent in the next four years, while the Veterans Administration will see mounting health-care costs with an aging veterans population.
Some technology-intensive agencies like the National Weather Service may save money through automation, said Joe Minarik, a top budget official under former President Bill Clinton. But others, like the Social Security Administration, will find that more powerful computers won't necessarily boost productivity.
"You've just doubled the speed of the computer behind me, but the elderly person on the other side of the desk is not speaking any faster," Minarik said.
Others say the Obama administration needs to show a greater willingness to cut ineffective programs.
"It seems incapable of producing budgets that identify program areas that don't work. Everything works for these people," said Jim Dyer, a former top Republican staffer on the House Appropriations Committee.
The Obama administration last year proposed $5.2 billion in discretionary spending cuts, and another $3.3 billion from defense. Because Congress has not passed any spending bills for the fiscal year that started last October, those cuts have not had a chance to become law. But many of them have already been rejected by Obama's Senate allies.
The White House also tried to shift some highway programs out of the discretionary category, which would have freed up $44.5 billion over a 10-year period. Congress also rejected that idea and opted to fund highway spending with discretionary funds for at least another two years.
Many budget experts expect Congress will ultimately conclude that the spending caps are too severe to work. The drive to cut spending could abate in coming years as well if an expanding economy boosts tax revenues and narrows budget deficits.
But meanwhile, Obama will have few resources to implement his economic vision.
"When I hear an aggressive agenda for investment, given the numbers we're looking at under the Budget Control Act I tend to be highly skeptical," Minarik said.
(Editing by Marilyn W. Thompson and Doina Chiacu)