President Obama was huddled in talks yesterday with congressional Democrats over proposals that would pare his $3.6 trillion budget, raising question marks over how he would fund promises on healthcare, climate change and tax cuts.

Although the President was braced for ferocious opposition from Republicans, who warn that his spending plans will bankrupt America, he also faces growing hostility from a group of fiscally conservative Democrats alarmed by forecasts of a $9.3 trillion (£6.3 trillion) deficit over ten years.

Kent Conrad, chairman of the Senate Budget Committee, outlined a spending plan on Tuesday that would eventually cut annual deficits by two thirds but severely weaken the President's ability to extend health coverage to the uninsured or introduce measures designed to combat global warming.

His proposal would eliminate the $250 billion set aside for future bank bailouts and assumes that the “making work pay” tax credit for low and middle-income households - a key pledge during the election campaign - will expire next year. While Mr Obama had sought a $634 billion “down-payment” for healthcare reform over the next decade, the Senate plan says that this must be paid for through savings elsewhere or tax increases at a later date.

Neither the Senate version - nor the slightly less severe proposal suggested yesterday by the House of Representatives Budget Committee - would include Mr Obama's scheme for a $15 billion a year “cap-and-trade” system on carbon use. This has encountered stiff resistance from Democrats in coalmining states such as the key electoral battlegrounds of Ohio and Pennsylvania, who say that 85 per cent of their energy comes from such fossil fuels and that it could have a devastating effect on a manufacturing sector already stricken by the recession.

Eric Cantor, a member of the Republican leadership in the House, claimed yesterday that Mr Obama's budget was “so far out of the mainstream” that even Democrats were reluctant to support it.

The more liberal Democrats are furious that key parts of Mr Obama's agenda are being threatened by the moderate wing of the party - the Blue Dogs. But Senator Ben Nelson said before lunch with the President yesterday: “I truly believe we're going to have to reduce the spending levels significantly. We're going to have to shift, create a continuum for a lot of the goals and priorities for more than one budget. Ultimately, he'll have to tell us how that can happen.”

The White House sought to put a brave face on the divisions yesterday. Peter Orszag, Mr Obama's budget director, said that the competing versions of the legislation submitted by Congress “may not be identical twins to what the President submitted - but they are certainly brothers that look an awful lot alike”.

He acknowledged that the “making work pay” tax credit may be lost but said that the Administration had “two years to figure this out” before the temporary version established in the economic stimulus package expired.

Mr Orszag said that the Administration was beginning a comprehensive review of the federal tax system to close loopholes and generate extra revenue to rein in the galloping deficits. He said: “The only constraints are no tax increases for families earning below $250,000 a year and no tax increases in 2009 and 2010” - when the economy is likely still to be weak.

Mr Obama used his press conference on Tuesday night to urge Congress to back a budget that he accepted might need improvement in some areas. “If we acknowledge that we make mistakes sometimes and that we don't always have the right answer, and we're inheriting very knotty problems, [then] we can pass healthcare, we can find better solutions to our energy challenges, we can teach our children more effectively, we can deal with a very real budget crisis that is not fully dealt with in my budget at this point, but makes progress.”

Although he insisted that the healthcare and education measures were essential components of investments that would save money in the long term, he left himself room for manoeuvre over the cap-and-trade system, saying that it might take account of “regional differences” on carbon use.

Promises, promises

On healthcare “The question isn't how we can afford to focus on healthcare. The question is how we can afford not to. Because in order to fix our economic crisis and rebuild our middle class, we need to fix our healthcare system, too.”

October 4, 2008

On tax cuts “The choice in this election isn't between tax cuts and no tax cuts. It's about whether you believe we should only reward wealth or whether we should also reward the workers and workers who create wealth. I will give a tax break to 95 per cent of Americans who work every day and get taxes taken out of their pay cheques every week.”

October 27, 2008

On cap and trade “The market will set the price, but unlike the other cap and trade proposals that have been offered in this race no business will be allowed to emit any greenhouse gases for free. Businesses don't own the sky, the public does, and if we want them to stop polluting it, we have to put a price on all pollution.”

October 8, 2007

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