The federal government would run a $1.1 trillion deficit next year under President Barack Obama’s $3.7 trillion budget proposal, which already is drawing Republican criticism.

Both the deficit and total spending would be less next year than what’s projected for this fiscal year. Exactly how much the federal government will spend this year is still uncertain, however, since House Republicans want to slash spending by $60 billion or more over the last seven months of the year.

The president’s budget calls for a five-year freeze on federal discretionary spending, other than for security. The budget would offset increased spending on education, infrastructure, and clean-energy research with cuts in various other programs.

“It will mean cutting things that I care deeply about—for example, community action programs in low-income neighborhoods and towns, and community development block grants that so many of our cities and states rely on,” Obama said. “But if we’re going to walk the walk when it comes to fiscal discipline, these kinds of cuts will be necessary.”

These cuts weren’t enough for most Republicans.

“I still don’t see a sense of urgency from the president about the massive federal debt,” said Senator Lamar Alexander, a Republican from Tennessee. “His budget calls for too much government borrowing—even though the debt is already at a level that makes it harder to create private-sector jobs.”

By contrast, some liberal groups contend the federal government should spend more on programs that create jobs, given the nation’s high unemployment rate.

“The president’s top economic priority should be job creation, but the proposed budget does too little and turns too quickly toward deficit reduction,” said John Irons, research and policy director for the Economic Policy Institute, a think tank funded by labor unions.

SBA Loans Costlier Due to Defaults

The president’s budget proposes a 45 percent cut in the Small Business Administration’s budget compared with what was enacted in 2010, but that primarily reflects an end to the supplemental funds provided to the SBA over the past two years to boost lending to small businesses. This funding, which expired in December, enabled the agency to boost its guarantee on its flagship 7(a) loans to 90 percent and reduce fees on both its 7(a) loans and 504 loans, which primarily finance real estate.

If the supplemental spending is excluded, next year’s SBA budget would be $161 million higher than 2010’s base budget. That’s primarily due to higher subsidy costs for SBA loans. Defaults on government-guaranteed SBA loans are up, especially for loans made from 2004 to 2008, because of the economic downturn and declining real estate values. The SBA now estimates these defaults will cost the government $3.7 billion.

The agency can’t raise fees on its loans to cover this higher default rate because the fees already have hit their statutory maximum level. The SBA will ask Congress to pass legislation to allow it to raise loan fees in 2013, but the government will have to spend more on these loan programs next year if it wants to meet its goal of providing $24 billion in loans to small businesses.

If Congress balks at spending this much money to subsidize SBA loans, this program could shrink dramatically.

Higher Taxes on Wealthy Sought

High-income taxpayers, including the nation’s most successful small-business owners, would see their taxes go up under the president’s budget proposal. If Obama has his way, families making more than $250,000 would pay higher income tax rates in 2013. The president also wants to revisit the estate tax, contending the 35 percent rate in effect for the next two years is too low.

“While I had to accept these measures for two more years as part of a compromise that prevented a large tax increase on middle-class families and secured job-creating support for our economy, these policies were unfair and unaffordable when enacted and remain so today,” Obama said.

The budget plan also calls for limiting the breaks high-income taxpayers can receive from itemizing their deductions. This would pay for a three-year fix for the alternative minimum tax, which otherwise would hit many middle-class taxpayers.

Obama repeated his call for corporate tax reform, saying rates need to be reduced in order to make U.S. companies more competitive with their global counterparts. This rate reduction, however, would be accompanied by the elimination of targeted tax breaks for specific industries.

Obama proposed a permanent extension of a tax break that’s designed to encourage investment in small businesses. Under this proposal, investors who buy stock in small corporations and hold it for five years would not have to pay capital gains taxes when they sell the stock.

Clint Stretch, managing principal of Deloitte Tax LLP, said Obama’s tax proposals are “likely going nowhere” since Congress this year will focus on spending cuts, not taxes.

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Kent Hoover is the Washington bureau chief for bizjournals.