President Barack Obama submitted a proposal to cut $1.1 trillion in the budget over a span of 10 years. The implications of the proposal are widely debated by Democrats and Republicans alike, according to Reuters, and as the bickering continues, investors should be aware of potential consequences on the economy and financial markets.
While democrats concede that important programs are going to endure serious cuts, Republicans refute the proposal, citing the fact that it will not do nearly enough to reduce the ever-increasing deficit and naturally trust that their proposal is superior, according to the article.
According to a NBC "Meet the Press" interview with House of Representatives Speaker John Boehner, he concedes that the United States is broke, but as moderator David Gregory points out, leaders refuse to review the big money-chugging programs and instead are simply looking at about 16% of the budget. Boehner identifies Obama's proposal as essentially ineffectual, as jobs will be destroyed, and borrowing and taxes will be too high.
While the job outlook and tax levels may be a matter of opinion, there is evidence that borrowing is too high. U.S. Treasury Secretary Timothy Geithner told the president that interest expense will rise from 1.3% of gross domestic product (GDP) to 3.1% by 2016. This might also be a matter of opinion, but tripling the interest expense is not likely to be seen as a move in the right direction by the American public or government spending hawks.
Boehner presented the President with a letter signed by 150 economists who support spending cuts, but with the economy still in such dire straits, it is unclear exactly what effect spending cuts will have on the fragile and recovering economy. Will spending cuts decrease the uncertainty small businesses are experiencing? Or will it serve to throw a wrench in the slowly but surely improving economy?
With the Bush-era tax cuts extended for the next two years, the short-term solution to decreasing the deficit lies principally with decisions on spending. No politician in their right mind is going to touch Social Security or Medicare, the largest guzzlers of tax dollars in the budget; the proposed cuts may have significant and potentially unforeseen consequences on the economy. Speculation identifies several areas that may victim to spending cuts: airport grants, aid to water plants and infrastructure, according to the article. Exact details of the areas to be potentially affected will be identified later today.
If grants to large airports are cut, investors may consider evacuating positions in companies like Delta Airlines (NYSE: DAL), Southwest Airlines (NYSE: LUV) or taking short positions. Investors should pay close attention to the details of the budget proposals in order to anticipate long-ranging effects on companies within certain industries.
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