Money Morning Mailbag: Will Elections and a Resignation Open the Door for U.S. Budget Changes?

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Administration officials announced this week that the White House Budget Director Peter Orszag plans to leave U.S. President Barack Obama's Cabinet before work on the next U.S. budget begins, which could be some time in the next few weeks. Orszag would be the first member of President Obama's Cabinet to exit.

The U.S. budget is under scrutiny as the budget deficit is forecast to hit $1.6 trillion by 2011. A President-appointed panel is currently working on budget reduction plans to be presented in a report due in December.

Orszag's strategies as former head of the Congressional Budget Office (CBO) supported a stop to deficit spending, but once he was placed in the budget driver's seat, making significant cuts was nearly impossible with recovery progress slow and unemployment high. Orszag instead ended up helping outline the $787 billion stimulus package in 2009.

Orszag butted heads with the director of the National Economic Council Larry Summers over when to start fiscal consolidation and how much to cut from government spending. He continued his support of slashing budgets and announced a plan earlier this month to force some federal agencies to cut their 2012 budget requests by 5%.

"As stewards of the American people's tax dollars, we cannot afford to waste money on programs that do not work, that are outdated or that are duplicative of one another," Orszag stated in a June 8 speech.

Speculation on Orszag's replacements has begun, and potentials candidates include Laura Tyson, a former director of the National Economic Council; Rob Nabors, a former Office of Management and Budget deputy director who is now senior adviser to Chief of Staff Rahm Emanuel; and Jason Furman, Deputy Director of the National Economic Council.

The new appointee will ultimately be faced with the daunting task of balancing stimulus measures and deficit reduction. The new director also will have to handle whatever changes financial reform brings to the government spending structure, as Congress is set to finalize the bill this week.

While a change in positions doesn't always signal dramatic policy reform, Britain learned this week that new appointees could bring drastic developments when its new coalition government presented an emergency budget Tuesday after six weeks in office. The new austerity measures include cutting Britain's annual deficit by $180 billion over the next five years and slashing spending by 25% in some government departments, including cuts in public sector employment and salaries, public housing benefits, and disability allowances, and an increase in sales and capital gains taxes.

With U.S. midterm elections less than five months away, Money Morning Contributing Editor Martin Hutchinson analyzed how the upcoming vote could alter Congress. He predicted that while Republicans won't see a sweeping victory, they will gain more traction and make it more difficult for Democrats to fulfill their "wish list."

For the U.S. budget, this means continued stimulus measures will be in jeopardy as more spending becomes harder to justify in the face of growing debt. 

"[T]he U.S. budget deficit will remain intractable - with an annual shortfall in excess of $1 trillion that will refuse to budge, unless the U.S. economic recovery really takes off. And that's not likely to happen," says Hutchinson. "The massive financing needs of the federal government will ‘crowd out' the private sector in the bank and bond markets, so small business investment will be low, unemployment will remain high and economic growth limited."
Hutchinson also said the implementation of a value-added tax could be threatened by a strong Republican presence, and the fight over the future of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) will carry on as they continue to soak up billions in taxpayer money with no direct reform in sight.

So where does all this leave voters and investors? Voters have until November 2 to decide who they want to represent them in Washington, while investors should seek haven in gold and emerging market stocks, according to Hutchinson.  

Following is a collection of readers' views sent to the Money Morning Mailbag about the future of government spending and the importance of elections in helping the course of the U.S. budget.

Vote For the People's Candidate

We must dictate no debt financing. Take back your government. Become active in your government's expenditures and revenue sources. See that they follow the golden rule, not he who has the gold tells the rule. Since each level of government is in the deficit state we the taxpayers get dinged, dinged, and dinged again to pay the finance charges.

We the people need to come together and force the political machine to put their talk on the walk; elections are all around us! Make the politician take control of all government financing. He who has the right to tax has the power to pay the bill. Make sure that the political candidate is about the peoples' business, not the bankers' business.

- Gordon B.

Time to Analyze Inefficient U.S. Budget Expenses

We talk a lot about how government spending, borrowing, and taxing cause a heavy burden on our economy. However, the heavy hand of government regulation also adds a considerable burden, even though it can be harder to quantify. So here's the question: What regulatory agency or program exerts the greatest cost/budget damage to the U.S. economy? In this case, cost/budget refers to the cost to our national economy divided by the official budget of the agency or program primarily tasked with overseeing it. If we can identify some of these, and clearly explain why they cause so many burdens to our economy, we might be able to make some headway on changing or even eliminating some of them.

- Gordon F.

Stop Spending Our Money

 [U.S. debt] is currently over $100 trillion when you include unfunded obligations (contracts) for social security, Medicare and Medicaid - promises made to Americans to buy votes.

The total of stimulus and bailout programs since September 2008 is over $8 trillion alone between loans, loan guarantees and new money printed by the Federal Reserve - the bank that refuses to be audited. Sound fishy?

At least drunken sailors spend their own money.

- Moran

More Spending Not the Answer

If you want to hear from a 30-year financial services professional, here is my view from the "top": No, no, no more reckless spending again, ever! You cannot build wealth with such high debt payments; we have to control our spending to manage fund flow.

            - D.H.

 (**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Web site. Please include your name and hometown with your email.

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