Obama’s new budget shows just how badly we need to fix the deficit.

OMB chief Peter Orszag

The primary purpose of a president’s annual budget is to highlight his domestic and foreign-policy priorities. But this year’s budget may have a secondary purpose: to scare Congress into doing something about the deficit.

Annual budgets always contain bad news. But this year’s numbers are especially bleak—if not for the cuts they announce, then for the predictions they make about what the economy will look like a few years down the road. Take the unemployment rate. The budget projects that it will go down, but not especially quickly. The Office of Management and Budget estimates that after reaching 10 percent in 2010, unemployment will decrease to 9.2 percent in 2011, 8.2 percent in 2012, 7.3 percent in 2013, and 6.5 percent in 2014. The housing market, too, will recover slowly.

The most disturbing projection, though, is the deficit. If current trends continue, the annual deficit over the next 10 years won’t dip below $700 billion and will surge back to more than $1 trillion in 2020, according to the administration’s projections. That would add a total of $8.5 trillion to the national debt. The interest on that debt would balloon from less than $200 billion in 2010 to more than $900 billion in 2020. If you were hoping that reducing spending would help, William Galston of the Brookings Institution has bad news for you: “These projections assume that total spending for discretionary domestic programs will decline from $553 billion next year to $529 billion a decade later—a trajectory without precedent in modern U.S. history.”

Oh, also: This is all assuming health care reform does pass, reducing the deficit by an estimated $120 billion over 10 years. “All our steps to rein in the deficit will be for naught if we do not reduce the rate of health care cost growth over time,” Peter Orszag wrote in his accompanying essay.

You know there’s a problem if the government’s blueprint for reducing the deficit—the budget itself—raises alarms about the impossibility of doing so. The path to fiscal sustainability involves three steps, says Orszag. First is pay-as-you-go legislation, so Congress can’t dig the hole any deeper. Second is a combination of freezing spending, eliminating the Bush tax cuts for the wealthy, slicing back tax breaks for oil companies, and taxing big banks, plus various spending cuts: Anyone who supports NASA moon expeditions, anthrax vaccine research, or C-17 transport aircraft is likely to be disappointed by this year’s budget. Other cuts include tax breaks for coal companies, housing construction for the elderly and disabled, and grants to promote election reform. (See the whole list here.) According to Orszag, these spending cuts—along with the economic recovery—will bring deficits down from 10 percent of GDP in 2010 to 4 percent of GDP by 2015.

As for the remaining spending gap, the administration assumes that the bipartisan deficit commission proposed by President Obama in his State of the Union address will take care of it. Which, judging from the last couple of weeks, is a bold assumption. Last Tuesday, the Senate rejected the formation of such a commission, with many senators who had initially supported it ultimately voting against it. (Some Republicans claimed they didn’t want to raise taxes; some Democrats said they didn’t want to cut Medicare.) When the president proposed creating a similar body in his annual speech, Republicans were cold to the idea.

The new budget might change that. By highlighting the bleakness of the economic forecast if Congress doesn’t intervene, the budget becomes a rallying point for Democrats as well as a weapon with which to bludgeon obstructionists. And by offering a raft of solutions that gets us halfway there—or even one-tenth of the way, or one-twentieth—it signals a commitment to deficit reduction without making the president too vulnerable. It may serve Republicans to not cooperate now, says Michael Ettlinger, vice president for economic policy at the Center for American Progress. But that will change. Interest rates will rise, as will the number of voters who sense that their representatives aren’t addressing the deficit. Says Ettlinger: “It’s going to start being a problem.”