Last week, Paul Ryan’s plan for dealing with National debt emerged as the centerpiece of the debate on how to cut spending. Today, Obama presented his counter argument to Ryan’s harsh budget cuts that would reconfigure Medicare and have government spending account for just 18% of the GDP. Obama's budget is considerably gentler than Ryan’s. It would lower deficits by $4 trillion over a period of twelve years through four core platforms : cutting defense spending, eliminating Bush era tax cuts for the upper class, expanding upon cost-saving initiatives in health care reform and maintain abbreviated discretionary spending without shorting education, medical research, green energy and infrastructure.
Through the combination of these efforts and an attitude of “shared sacrifice,” or wealthy Americans giving back to the system, the President believes it’s possible to chip away at the crippling $14 trillion national debt. The plan presented was surprisingly bi-partisan, acknowledging the need for spending cuts but in the Presidents word’s, using “a scalpel and not a machete,” for execution.
Aides to President said that for every $1 in increased tax revenue there would be $3 in spending cuts and interest savings.
The President’s defense of social programs, particularly Medicare and Medicaid, was pronounced throughout the speech. He believes that the programs demand change but restructuring them beyond recognition is not on his agenda. Right now, the average person receiving Medical benefits puts $150,000 into the program over their lifetime, but receives $450,000, a disparity that unfairly burdens the younger generation. Cuts are mandatory to reduce the debt, but he's taking a reverse strategy in achieving them. Rather than placing less responsibility on the government for our citizen's medical bills, he wants more of it. The President plans to have the government take more control of the sector and help to make healthcare more efficient and less expensive. During the speech he points to a potential $1 trillion in savings made possible by the healthcare legislation passed over the last year and suggests building on that for further savings. This particular element of the speech seemed daunting, given the amount of Republican backlash greater socialization of healthcare programs tends to elicit.
“We are a better country because of these commitments,” he said of the programs and their importance, “I’ll go further — we would not be a great country without those commitments.” Still those commitments, alongside social security, account for 2/3 of the total budget spending and that needs to be reduced.
“Doing nothing on the deficit is just not an option,” he added. That’s where the cuts to defense and other spending come in.
“Over the last two years, Secretary Gates has courageously taken on wasteful spending, saving $400 billion in current and future spending (for defense)” the President said, “I believe we can do that again. We need to not only eliminate waste and improve efficiency and effectiveness, but conduct a fundamental review of America’s missions, capabilities, and our role in a changing world.” Obama said he intends to resume work with Gates and Joint Chiefs on identifying the areas that can be trimmed within defense, contributing to budget reduction both for this year and the years ahead.
The plan reads well and cutting defense spending, exiting the Middle East especially, is an obvious solution to minimizing the deficit. What it's now; however, is novel. Both healthcare reform and cutting back on the number of stationed troops has been on the table before, but reductions have not been dramatic and the issues often find themselves amid a bi-partisan tug-of-war.
This is perhaps why he proposed the “debt fail-safe” mechanism that would force legislators into ruthless cuts should the deficit not contract significantly by 2014.
This particular provision might be the variable that will make changes happen where they didn’t before. “Debt-fail safe” imposes broad-cuts on nearly all government programs provided in lieu of major improvements, serving as an incentive for legislators to actually make the cuts rather than just argue over them.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer