Behind Obama's budget proposals, a gloomy view of the future

By Jason Lange and Howard Schneider

WASHINGTON (Reuters) - Beneath President Barack Obama's plan to fight income inequality lies a gloomy view of an economy that is growing slower and creating fewer rewards for its workers than it did in much of the last century.

In a budget proposal unveiled on Monday, the White House cut forecasts for an array of economic variables, depicting less growth, weaker inflation and lower interest rates than officials expected only a year ago.

This comes despite an unemployment rate that the Obama administration expects to hit the 5.2 percent level considered to be roughly in line with full employment sometime this year.

The administration's take on the economy moves it closer to the growing view among economists that the United States could be stuck in a prolonged period of stagnation.

"In the 21st century, real GDP growth in the United States is likely to be slower than it was in earlier eras," the budget proposal says.

Obama's $3.99 trillion budget plan for fiscal 2016 would mark a spending increase of about $240 billion from the current year. [ID:nL1N0VC0VO]

The economic vision presented in the plan is all-the-more pessimistic given that it incorporates the impact of higher spending on infrastructure and education, as well as overhauls of tax and immigration laws. Many of those proposals are unlikely to pass the Republican-controlled Congress.

Even with these measures, which are aimed to counter rising income inequality, weaker growth would leave the economy about $500 billion smaller in 2020 than the administration projected a year ago. The administration expects the share of national income going to labor - as opposed to capital - to hold near historic lows for years to come.

An aging population that is less inclined to work could help limit long-run economic growth to around 2.3 percent annually, the budget says, a rate that would be roughly a percentage point lower than the average since World War Two.

In the White House view, the jobless rate could drop to as low as 4.9 percent in 2017. But even that is not expected to lead to substantial wage or price increases, suggesting officials are sympathetic to stagnation arguments made prominent by economists, such as former Treasury Secretary Lawrence Summers, who have argued the government should spend more to make up for weak private sector demand.

While the White House's estimate of potential growth was unchanged from a year ago, it now sees interest rates holding lower for years even under the assumption that the government boosts spending substantially, something that in other eras would lead lenders to jack up interest rates more.

"The administration forecast projects that interest rates will stabilize below their historical averages," while inflation is expected to remain low for years to come, according to the budget documents.

    Other developed economies are confronting a similar set of circumstances, and slowly acknowledging that their long-run potential may be constrained. The Obama administration has been pressing European nations, primarily Germany, to act accordingly and lift government spending to make up for weak household and business demand.

    In the wake of the 2007-2009 financial crisis, the administration was restrained in its own response, as it tried to control the deficits generated by stimulus programs set in motion to battle the deepest economic downturn since the Great Depression. The impact of budget cuts continued to be felt through last year.

    The latest budget document marks a turn in that debate as Obama makes the case for more government pump priming.

(Reporting by Howard Scheider and Jason Lange; Editing by Tim Ahmann and Tomasz Janowski)