US cost-cuts: Cutting five per cent of optional government spending won’t plug America’s fiscal hole. Still, President Barack Obama's proposal may buy a bit more time with nervous financial markets. It could even kick-start a needed rationalisation of government outlays. Every little helps — but Obama needs to go further.
The tweaks that Obama seems to be calling for land well short of the big cost-cuts eventually needed to get the US budget in order. They would affect only discretionary spending unrelated to security, and only starting in 2012. In that year, the projection for such expenses (outside defense and homeland security) is roughly $600 billion. So a five per cent cut would be $30 billion, or 0.2 per cent of GDP. The budget deficit that year is expected to be $915 billion, or 5.8 per cent of GDP, according to the Congressional Budget Office. The cuts, in other words, would easily disappear in the overall deficit forecast’s margin of error.
So-called entitlements are where the real money is. A five per cent cut in health and pension programs, for instance, would amount to $105 billion.
And such “mandatory” spending will increasingly dominate. Currently, this category of spending is half as large again as all discretionary spending. By 2020, that ratio could expand to 120 percent unless Obama’s deficit commission is able to fashion a set of entitlement reductions acceptable to Congress.
Then again, even small cuts in wasteful or inefficient discretionary spending are good news. Obama also wants federal agencies to identify their poorly performing programs, an effort to force them to measure and critique performance - and cut expenditure that doesn’t get results.
And Obama has plenty more scope. Defense spending is half of the total discretionary category. Some Republican budget hawks might even applaud well-chosen cuts. And reducing the federal workforce by 25 percent would save $650 billion by 2018, according to simulations run by the Committee for a Responsible Federal Budget. Eliminating earmarks - self-serving pork slipped into spending bills by members of Congress - would save another $160 billion by that year. It would also show the public that Congress takes austerity seriously.
The 5 percent cuts may be at least 50 percent PR. But if they make voters more willing to accept future fiscal pain, they are 100 percent a good start.
