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Are Steep U.S. Spending Cuts Inevitable?

U.S. Rep. Paul Ryan (R-WI), the chairman of the House Budget Committee, is adamant Republicans will resist any further tax increases – a staunch GOP stance that makes steep spending cuts almost certain.

Ryan, the 2012 vice president nominee, told NBC's "Meet the Press" Sunday that the $1.2 trillion worth of automatic spending cuts will take effect because "Democrats have opposed our efforts to replace those cuts with others."

In the NBC interview, Ryan took aim at President Barack Obama.

"I don't think that the president actually thinks we have a fiscal crisis," Ryan said. "He's been reportedly saying to our leaders that we don't have a spending problem, we have a healthcare problem. That leads me to conclude that he just thinks we ought to have more government-run healthcare and rationing."

GOP Insists On Government Spending Cuts

Republicans have been vehement of late in insisting on cutting government spending, including entitlements, as the debate over the debt ceiling has come back into focus and the sequestration deadline looms.

Team Obama maintains taxes must be included as part of any deal that averts across-the-board spending cuts set to wallop the Pentagon and scores of domestic programs in weeks.

Ryan's comments came days after the Republican-controlled House voted to extend the debt ceiling until May 19, allowing the Treasury to borrow funds until then. After that, the Treasury could again implement "extraordinary measures" to avert another default, which would give the government two more months.

Ryan noted Democrats had succeeded in getting higher taxes for wealthy Americans in the down-to-the-wire fiscal cliff deal, but said they shouldn't expect more.

"The president got his additional revenues. So that's behind us," Ryan said. "Are we for raising revenues? No we're not. If you keep raising revenues, you've not going to get decent tax reform."

As lawmakers on Capitol Hill wrangle over raising the debt ceiling and cutting spending, consumer confidence is already waning.

The latest read revealed the December index dipped for the second consecutive month to the lowest level since August 2012, driven by fears of tax increases and impending government spending cuts.

Government Shutdown Possible

Meanwhile, the possible spending cuts could lead to a government shutdown or freezing of non-essential services, an economist warned.

In a recent research note to clients, Morgan Stanley's chief U.S. economist, Vincent Reinhardt, wrote, "The odds favor a government shutdown. The experience of 1995 to 1996 reassures that the world will not end. However, the drag on spending will likely be more significant than market participants expect."

Reinhardt said that could hurt consumer confidence and prompt ratings agencies to downgrade the U.S. credit rating.

The last time a downgrade happened, when Standard & Poor's stripped the United States of its coveted triple-A rating in August 2011, all three major indexes plummeted. The Dow sank 5.6%, the S&P 500 Index tumbled 6.7% and the Nasdaq shed 6.9%.

The downgrade was unprecedented, so investors didn't know what to expect.

Now that we do know what we can expect should Fitch and Moody's follow through on threats to downgrade the nation's sovereign credit rating absent a sustainable debt deal, market participants should brace for a free-fall.

Following the historic downgrade, President Obama said, "Our challenge is the need to tackle our deficits over the long term. But here's the good news. Our problems are eminently solvable. And we know what we have to do to solve them."

But thus far, the president and his camp have done little to address and solve the deficit problems plaguing the country. That's not good news, here or abroad.

As Yazan Abdeen, a fund manager at ING Investment Management, told the Financial Times following the summer 2011 credit downgrade, "There is a realization that the U.S. might actually be in more trouble than people thought. People are selling now, asking questions later."

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  1. H. Craig Bradley | January 29, 2013


    However you chose to look at the matter, it all boils down to a simple problem: spending exceeds revenue (income) on an annual basis. Looking at the details of the financial melt-down in 2008 and the extent to which so many key individuals and institutions went along with the subprime mortgage and bank loan "frauds", I have to say we deserve whatever we collectively get. We sure got the President(s) we all deserve.

    The problem is very diffuse and systemic and has not changed for the better since then. So, if that eventually means a complete financial collapse (of all U.S. BANKS) or just a significant reduction in everyone's net worth ( as measured in U.S. Dollars), then so be it. One thing is for sure, people don't change.

    President Obama is NOT going to support extensive cuts to baseline budgets in the Federal government or entitlement reform (cuts in benefits). Not going to happen on his term. Congress has no choice but to raise the debt ceiling after "putting up a fight". Republicans do not have sufficient political support with the people to enact any serious policy reforms.

    As far as a "government shut-down", well that's largely a myth too. I saw it happen as a Federal employee in 1985. The U.S. Forest Service was told to send most of its regional office employees home, as they were defined as "non-essential" by the higher- ups. Meanwhile, on the third floor, Corps of Engineers civilian employees were all considered "essential" and told to report to work as usual during the so-called first ever Federal government "shutdown". People still believe all that rhetoric and bluster. I do not.

  2. Attila | January 29, 2013

    We need a stimulative spending cut. Keynes was a theoretician with little business savvy. No better example exists than the difference between Coolidge's response to a severe recession (cut government spending and taxes) which led to a quick recovery, and Hoover's/FDR's opposite response which led to a decade long downturn. Government spending crowds out business in the capital markets or extracts wealth thru taxation or inflation and produces little of value. Worse, it invariably leads to increased regulation and economic drag.

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