The Budget Wars: Now beginning

Morris Segall      bailout, budget deficits, democrats, financial Armageddon, fiscal wars, national debt, national economic philosophy, new fiscal discipline, obama, politics, republicans, U.S. government default, U.S. government shutdown

Last week’s melodrama leading up to the eleventh hour avoidance of a Federal government shutdown is just the beginning of the new fiscal wars over the U.S. budget for this fiscal year and beyond. The discussion of U.S. fiscal policy has now turned from stimulus, bailouts and economic recovery to debt reduction and redefining the role of the Federal government in the economy. Starting with the release of the Republican led House Budget Committee’s aggressive plan for deficit reduction, followed by steadfast demands for major reductions in federal spending  to avoid the government shutdown, the Republican party has now shaped and defined the fiscal discussion and taken the lead from the President and the Democrats in Washington. The President, on the defensive, will reveal tomorrow evening his plan for reducing projected federal deficits going forward and lowering the level of the national debt as a percentage of our GDP.

In arriving at their compromise last week on nearly $39 billion in spending cuts for this fiscal year, the President was fortunate in being able to utilize a number of “one time” program reductions, cost cuts already approved by Congress and unused funds from previously adopted appropriations. This “low hanging fruit” may be as much as $20 billion of the $38.5 billion compromise. The President and the Democrats in Congress will not be so fortunate going forward. The President knows he must propose a credible deficit reduction program in an attempt to get Republican cooperation in raising the federal debt ceiling by early May. Such a plan will likely include tax increases as well as significant spending reductions. The President and his party will try to salvage as much of their fiscal and social agenda as possible.

Given the strong philosophical differences between the parties, we believe the President’s submission tomorrow evening will be rejected as insufficient and inclusive of unwelcome taxes by Republican hard liners in the House of Representatives. Another period of gamesmanship between the Republicans in the House and the President and the Democratically controlled Senate will ensue between now and early May, when the government will run out of money, to attempt a budget compromise and avoid a federal government default. The parties will use this period to blame each other for taking the country to financial Armageddon. We are optimistic neither party want to be held responsible for that and last minute concessions will avert disaster.

We have long warned of deteriorating federal finances, long before the recent recession, and been critical of the burgeoning federal debt, unsuccessful fiscal “ bailout” and excess liquidity programs to the extent we have been steadfastly pessimistic in regards to the long term U.S. financial and capital markets outlooks. We are in the process of examining the federal financial situation and the proposed solutions in an upcoming website article. However, the current chain of events and resulting dialogue represents a sea change in our national economic thinking and philosophy. The potential economic changes resulting from a new fiscal discipline in Washington will have profound impacts on all of us, our children and grandchildren.

Morris R. Segall