WASHINGTON (Reuters) - President Barack Obama proposed a budget on Monday that would cut the U.S. deficit by $1.1 trillion over 10 years, setting the stage for a bitter fight with Republicans who vow even tougher spending controls.
— Obama budget aimed at cutting deficit by $1.1 trillion over 10 years
— Deficit to rise to $1.645 trillion in fiscal 2011, then fall to $1.101 trillion in 2012.
— Republicans aim to make 2012 presidential election a referendum on Democrat Obama’s fiscal track record.
“The deficit for 2011 seems to be on the high side — $1.6 trillion is a little above ours. We are looking at only $1.4 trillion this fiscal year. Their economic assumptions for 2011 seem to be on the low side, they are trying to be very conservative as far as the near-term projections go, maybe to surprise everyone when it comes to 2012 elections.
“Overall, when you look at the profile as far as what they want to do in terms of reducing the deficit, reducing it to three percent debt to GDP by 2017, a lot of the heavy lifting has yet to be done. A lot of the mandatory spending initiatives are absent. This still leaves the U.S. on a path to a negative outlook from the ratings agencies given the current trajectory. Without any real changes to mandatory spending and a concerted effort to pass this, there is still a risk of a U.S. downgrade in a couple of years from now.”
FRED DICKSON, CHIEF MARKET STRATEGIST, D.A. DAVIDSON & CO. LAKE
“Probably the only surprise was the projected budget deficit going up this year to $1.65 trillion .... That’s a very significant increase. The last projection was $1.5 trillion now we’re at $1.65 trillion for the current fiscal year. I think what it’s going to do is intensify the political debate surrounding the budget and my immediate reaction is it will probably put more pressure on bond yields.”
WARD MCCARTHY, CHIEF FINANCIAL ECONOMIST, JEFFERIES & CO.,
“The key point from the budget is that it’s a political document, so the numbers I think are relatively meaningless and that’s not a condemnation of President Obama; that’s just the way things tend to be. What matters in it is that he has made some effort to cut into spending and set a tone, but of course he dodged the big issues, which are the entitlements.
“He has also set a landscape that has made it clear that as far as he’s concerned we also need an increase in taxes.
“The budget has set parameters. The debate will revolve around these parameters.
“Congress is going to begin discussion on the debt ceiling. That will supersede the President’s budget in short order.”
“If you look at the near term forecasts, they are about right. But the (deficit) narrowing they have further out is a bit aggressive based on their assumption of their policies, GDP and interest payments.
It’s a step in the right direction. It’s a difficult task which it’s going to take time and debates among policymakers.
The bond market may be recognizing that the government is taking some responsibility on the budget.”
“This helps incrementally, but we haven’t resolved the issue around entitlements yet. They don’t truly attack the true drivers of our fiscal situation down the road, which are Medicaid, Medicare and Social Security. Neither party wants to hit the political third-rail yet.”
“From a financial markets perspective there is a lot of angst about U.S. debt. The president’s proposal does not tell much and we want to see what happens with a negotiation with the Republicans.
“Are we going to get another situation as last December with Obama spending increases and Republican tax breaks or actually get true signs of greater fiscal responsibility. We do not know from this initial proposal. The markets want a credible plan for the next 10 years. This will be an important test case.
“If what is decided on next year’s budget will tell you the Obama administration and Republican Congress can come up with a 10-year plan to reign in the budget that will be a good sign. If they cannot agree on one year’s worth, fail to raise the debt ceiling and we have six months of fighting then forget about it and it is not what financial markets want to see in this presidency. Today’s release, however, does not tell enough yet.”
“It certainly appears as though there are competing interests now. It’s becoming fashionable to talk about spending cuts, and that is pretty remarkable. I think what the Street is really honestly hoping for is more — and more painful. Speaking specifically of tackling the unheard of, the entitlements. That is where the real game changes. This is great that Obama is talking about reducing the federal deficit by $1.1 trillion over 10 years. That is not going to have the impact that general consensus on the Street needs. And much more importantly it’s not going to have the impact that foreign investors need because the real problem is financing the debt and the biggest appetite for debt comes from overseas in the form of governments. And a $1.1 trillion cut over 10 years doesn’t even scratch the surface. It couldn’t be less impactful in terms of (the market). It’s a yawn.”
“Its interesting, but is it concrete and something this market can trade on over the next 24 hours or days, or even months? No I don’t think so.”
“You’ve got both parties looking to reduce the deficit, it at least says that they are both looking at the same idea, that if we want to get elected we need to be deficit responsible.”
“On the margin it is going to be bond market supportive, but I don’t think it will make people start buying them. I think people are looking at much shorter term things.”
“This is all political pre-positioning. This is just the first serve in a match that will volley back and forth for a couple of weeks. Markets are quiet right now; we’re not hearing a lot about the budget. It isn’t really a tradable event right now, but we’ll know more as the story unfolds. The odds of a government shutdown will be known by the end of the week.”