Tuesday, January 26, 2010

Spending Freeze Will Reduce Deficit by 0.8%

'New and improved Obama', as Drudge headline proclaims (see the picture), is to propose federal spending freeze in his State of the Union address on Wednesday. Since his health care "reform" has floundered, defeating the purpose of delaying the address, the suddenly populist president has decided to join the rest of us in attacking the ever increasing federal deficit.

One obvious problem here is his record budget size and his record budget deficit, not this year but as far as eye can see.

According to various news reports (here's one from Washington Post), Obama is to propose a freeze for 3 years on federal discretionary spending, excluding the military, veterans affairs, homeland security and certain international programs. Also excluded will be the various stimulus packages past, present, and future. Total of the affected spending amounts to $447 billion. Obama's proposal will cut $10 to 15 billion, or 2 to 3 percent, from that $447 billion, for 3 years.

Discretionary spending makes up about one-third of the total federal budget. Each year, Congress determines how much to spend/not to spend on which programs. The remaining two-thirds is called mandatory spending, which includes entitlement programs like Medicare and Social Security.

Now, Obama's 2010 budget is whopping $3.5 trillion dollars. $447 billion worth of programs subject to the freeze is only about 13% of the total budget. In relation to the total budget size, this 10 to 15 billion saving amounts to 0.3% reduction in budget size. As to the impact on the deficit, 10 billion reduction of the projected $1.3 trillion deficit is less than 0.8%.

Washington Post's article has this amusing quote from Senator Kent Conrad, chairman of the Senate Budget Committee:

Senate Budget Chairman Kent Conrad (D-N.D.), a strong proponent of balanced budgets who would have to sell the notion of a freeze to his colleagues, said Obama's proposal is "entirely possible to do." The results of a freeze would be "relatively modest in terms of overall deficit reduction," Conrad said. "But it sends an important signal that everything is on the table."

'Relatively modest' is such an understatement, as it reduces the projected deficit by 0.8% or less. And it is unlikely to send "a signal that everything is on the table" because everything is not on the table. Defence-related spending is untoucheable, so are the entitlements. Unless they default, they can't cut the interest payment on the Treasuries. The incredibly wasteful stimulus spending could be made efficient, and should be easy to shave $10 billion from $787 billion package, but that's another untouchable.

What President Obama and his government are doing is little more than image control, much like some advertisement campaign of branded goods. Perception is everything.


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