–President Obama Calls For Discretionary Freeze; Quiet On Entitlements
–Obama Urges Cuts To ‘Excessive Spending Wherever We Find It’
–Congressional Budget Office Sees $7 Trillion In 10-Year Deficits
–But Key Budget Groups Warn Outlook Is Much Worse Than CBO Says
–Senate Budget Committee Chairman Eyes Long-Term Deficit Cut Plan

By John Shaw

WASHINGTON (MNI) – President Obama’s State of the Union address and
the Congressional Budget Office’s release of updated budget and economic
projections dominated the week’s fiscal news and budget experts found
little that is encouraging in either.

In his Tuesday evening speech before a joint session of Congress,
Obama offered upbeat themes, saying the U.S. has emerged from a
traumatic recession and now needs to begin preparing for long-term
economic challenges. “This is our generation’s Sputnik moment,” he said.

The president called for fiscal discipline and also recommended new
spending in education, training and infrastructure programs.

Obama called for a five-year freeze in non-defense discretionary
spending, a step he said would save $400 billion. And he also urged
Congress to work on both individual and corporate tax reforms.

But the president acknowledged that domestic discretionary spending
only represents about 12% of the federal budget.

He made a glancing reference to the work on the Simpson-Bowles
fiscal commission that recommended a nearly $4 trillion package of
spending cuts and revenue increases. He said the panel “made important
progress,” but added that he didn’t “agree with all of their proposals.”

Obama said the panel’s central conclusion was that “the only way to
tackle our deficit is to cut excessive spending, wherever we find it–in
domestic spending, defense spending, health care spending and spending
through tax breaks and loopholes.”

But many noted that Obama offered few specific proposals in any of
these areas. He did call for a “bipartisan solution to strengthen Social
Security,” but offered no details on how this might be done.

House Budget Committee Chairman Paul Ryan gave the official
Republican response and said the U.S. is “approaching a tipping point”
on fiscal matters. “We face a crushing burden of debt. The debt will
soon eclipse our entire economy and grow to catastrophic levels in the
years ahead,” Ryan said.

He also reiterated that Republicans will demand some spending cuts
before voting to approve an increase in the debt ceiling. “Endless
borrowing is not a strategy; spending cuts have to come first,” he said.

The day after Obama’s State of the Union speech, the CBO released
its updated budget and economic report. It said that it expects the
current 2011 fiscal year budget deficit to hit $1.48 trillion before
beginning a steady decline over the next several years.

However, the CBO report added that its projections almost certainly
“understate” the severity of the nation’s fiscal outlook because it must
adhere to budget law that assumes that current spending and tax policies
will remain in place.

Assuming that current budget and tax policies continue, CBO sees
budget deficits falling to $1.1 trillion in FY12, $704 billion in FY13,
$533 billion in FY14, $551 billion in FY15 and $659 billion in FY16.

Looking further forward, the CBO sees deficits of $617 billion in
FY17, $610 billion in FY18, $696 billion in FY19, $739 billion in FY20,
and $763 billion in FY21.

For the FY12 through FY16 period, the CBO sees cumulative deficits
of $3.547 trillion and for the FY12 through FY21 period it sees
cumulative deficits of $6.971 trillion.

The CBO said that under this scenario, the public debt as a
percentage of GDP would grow to about 75% in 2015 and 77% in 2021.

CBO director Doug Elmendorf, in testimony Thursday to the Senate
Budget Committee, said the longer the nation waits to reduce budget
deficits the larger the changes will have to be–and the more
“disruptive” these changes will be on the economy.

Elmendorf said there is no way to know for sure when American
fiscal policy reaches a “tipping point” in which a major crisis would
ensue. But he said that investors could “become increasingly nervous” if
the U.S. fiscal trajectory doesn’t change.

Two leading budget groups said this week that America’s fiscal
outlook is far worse than the CBO’s official forecast.

In separate reports, both the Committee for a Responsible Federal
Budget and the Concord Coalition noted that CBO had to adhere to budget
law which requires assuming that current spending and tax policy will
continue.

Both budget watchdog groups agreed that more realistic spending and
revenue assumptions show a budget deficit outlook of remarkable gravity
for the U.S.

The Concord Coalition said that a “more realistic assessment of the
federal government’s fiscal path” shows cumulative 10-year deficits of
more than $13.5 trillion, with the deficit never falling below $1
trillion and debt held by the public rising from 74% of GDP to 104% of
GDP.

This assumption is based on extending the Bush era tax cuts,
adjusting the alternative minimum tax along the lines Congress has done
for several years and offering a more realistic projection of Medicare
physician payments based on recent policy actions.

The Center for a Responsible Federal Budget also said the CBO’s
official deficit estimates are not realistic.

“Though the debt path outlined in CBO’s baseline is troublesome, it
is wildly optimistic,” it says.

Both budget groups challenged the heavy focus that both Obama and
congressional Republicans have placed on freezing or reducing
discretionary spending.

“Elected officials in both parties should drop the pretense that
cuts in domestic discretionary spending or a more robust economic
recovery can do all the hard work of deficit reduction in the coming
decade,” the Concord Coalition said.

“Democrats and Republicans have set out competing visions for the
role and size of government, but they have been united in avoiding a
realistic assessment of how the numbers add up. The new CBO report
dispels the notion that there are politically easy options for dealing
with our fiscal challenges,” it added.

The Concord Coalition report offered its recommendation on the
areas in which deficit reduction efforts should focus. “Entitlement and
tax reform should come first, followed by defense and then discretionary
spending,” it said.

The Center for a Responsible Federal Budget urged Obama to submit
as part of his Feb. 14 budget a “detailed proposal to bring the debt
down” and urged Congress and the White House to “work together to solve
these problems.”

The budget group also urged policymakers to assemble a broad
deficit reduction effort.

“We need a comprehensive plan to reduce and control all parts of
the discretionary budget, bring federal health care spending in check,
put Social Security on a sustainable path, and reform the tax code in a
way that encourages growth and raises revenue at the same time,” it
said.

Senate Budget Committee Chairman Kent Conrad said the CBO report
shows that American fiscal policy is moving steadily in the wrong
direction.

He added that he is working with other lawmakers on a long-term
deficit reduction plan that would be modeled on the Simpson-Bowles
report.

He also said this week that a long-term deficit reduction plan
should be attached to an increase in the debt ceiling, but added that
several short-term extensions might be needed before the deficit
reduction plan is ready.

** Market News International Washington Bureau: (202) 371-2121 **

[TOPICS: M$U$$$,MFU$$$,MCU$$$]