This budget covers the period 10/1/2011 through 9/30/2012. That makes this all about elections. That being the case don’t expect to see any evidence of that “fiscal responsibility” we keep hearing about.
That’s not to say that the Administration won’t make a big deal of some big cutbacks they will propose. We got a whiff of that from the Presidents budget director Jacob Lew. He listed $750mm of savings that will be proposed in a NYT OpEd piece.
The billion or so of savings will not make a dent in the growing expenditure line. Depending on where the revenue estimates are made the deficit will come in around $1.2 T (1.5T in 2011). Depending on how honest the numbers are, the media is going to have a field day, and so will the Republicans. While the notion of another mega deficit in 2012 is not a surprise on Wall Street it is not going to over so well on Main street. But what can the President do? Answer: Nothing.
One character in this drama is Alan Simpson. The former Co-head of the Deficit Commission is 80 years old and has a very bad habit of saying things that color the debate. He did it again recently. But as whacky as this guy is, he is right. There is no way the US is going to make any dent in the deficit unless Social Security, Medicare, Medicaid and the Military (“the Big Four or BF”) are put on the table and sliced up. The discretionary budget comes to only 10% of outlays. There is no room to make big changes. Simpson had this to say about cuts outside of the BF: (Bloomberg link)
Promises to cut earmarks, waste, fraud and abuse and foreign aid are a “sparrow belch in the midst of the typhoon”.
Simpson put it on the line with this comment about the need to make cuts outside of discretionary spending:
Anybody giving you anything different than that, “you want to walk out the door, stick your finger down your throat, and give them the green weenie.”
Just a question, What is a green weenie? Keep in mind that this guy is serious player in the outcome of this. It’s too bad he is such a nut. A saner elder statesman might have made a difference.
It’s possible that the US budget will be a ho-hummer for the markets. It’s hard to expect this to be one of those ‘confidence boosters’. Depending on how the foreign press handles the story it could be a source of some dollar weakness. I think the long end of the bond market might not like to be reminded how bad the supply problems really are. The question is, do we see any leakage in the short end. If two’s and fives react, the broader market will take note. The equity market is oblivious to any bad news of late. That said, You can’t ignore this elephant forever.