Friday, November 13, 2009

Budget Freezes, Spending Cuts Possible Says White House

To follow up Mike's posts above, this is bad news for US GDP growth. From the linked AP/CNBC story:
The Obama administration is alerting domestic agencies to expect their budgets will be frozen or even cut by 5 percent, part of an election-year push to rein in record deficits that threaten the economy and Democrats' political prospects next fall.

This blog has identified that FY 2009 GDP was favorably affected by the year over year increase in Federal spending in this post. Last year's increase in "real" Federal spending was equivalent to 4.4% of the previous year's GDP. If the administration makes across-the-board 5% cuts as the idea floated in this article suggests, this year's "G" contribution to GDP will be impacted.

Review: Y = C + I + E + G where

Y = GDP, C = Consumer Spending, I = Investment made by industry, E = Excess of Exports over Imports, G = Government Spending. The component amounts of GDP need to be sustained or grow year over year or GDP will fall (bad!).

FY 2009 real Federal spending came in at about $4T, a 5% cut would mean a $200B reduction for FY2010 or equivalent to negative 1.43% of our $14T GDP. Ironically, this potential $200B reduction would negate the positive effects of the "stimulus" which have been running at about a $200B annual rate.....hello 12% unemployment?

This could be just political posturing by Obama administration officials, one way to tell is to keep watching the daily/weekly/monthly fiscal information released by the Treasury Dept.


MortgageAngel said...

It makes me wonder what a typical day at the office looks like at the White House.

Matt Franko said...

They seemed to be pre-occupied with deficit reduction.

It's hard to tell what the fiscal fallout may be, it could be that the 5% cut is only for discretionary programs, and overall entitlements will still increase for instance. the article also says tax increases are on the table, etc...I hope it was just more hot air!

Matt Franko said...
This comment has been removed by the author.
Ryan Harris said...

All the talk of recovery seems debunked. If you look at Mike's formula C,I,E, and G: First C, consumer spending: Retail sales sales tax collections have been coming in lower, not higher. ( And since states get most of their revenue from Sales Tax, they too are trimming budgets. The Pew center projection for state budgets shows a whopping FY 2010 shortfall of as high as 49% but an average in the 20% range. ( And the Federal Government is going to freeze budgets according to Mike. There goes G's contribution to Y. As always the E is once again more negative. Not surprisingly the trade deficit swelled last month as Central Banks propped up the values of their currencies relative to the dollar. ( So all that remains on the upside is I, investment by industry. By all accounts the stock market and bond market have been rising rapidly and are providing money to industry at a break-neck pace so they can begin investing. Industry has a lot of work to do to pull us up up and away.

Matt Franko said...

Yes they all look bad, now including the G.
Check your take on the I, my view: just because stock and bond prices (financial assets) go up, I dont think it is given that I increases. Only if the companies say for instance increase inventories, or buy new plant and equipment, or vehicles, etc. (ie real assets) would I increase.

Also related to C/G, another thing I heard is that the COLAs for Social Security and Medicare are going to be near Zero% in January 2010, from about a 5% increase this past january.

mike norman said...


"I" and "C" can roll on for a while if bank lending resumes, which may be happening. Household financial obligations ratio has come down meaning that households can take on more debt for the time being. If job growth comes into the mix the recovery can be sustained even longer, at least until the point where fiscal drag (falling "G") and "NE" tip the scales in the other direction.