Posted on Monday, January 31, 2011
President Barack Obama proposed a five-year freeze in government spending in his State of the Union speech Tuesday night, but the actual significance of that freeze will depend upon how it's implemented.
The size of the savings from such a freeze is unclear, just as the permanence of such a policy would also be an open question, according to a new report from Goldman Sachs analyst Alec Phillips. The "freeze" Obama has proposed -- which would prevent about 12 percent of the Federal budget from expanding above current levels -- would likely build on the three-year freeze he outlined in his speech last year, and it might not be as constricting as it might seem.
The president's proposal comes at a time when lawmakers of both parties have warned about the rising deficit, as spending is currently projected to outpace revenue by about $1.4 trillion. Meanwhile, the government debt has surpassed $14 trillion, as the U.S. must borrow money to fund its obligations. The issue will come to a head when Congress debates whether to raise the debt limit, a move that could prevent a disastrous default, many economists say.
Under Obama's new proposal, keeping non-defense discretionary spending flat over the next five years could save $1 trillion, compared to a policy in which such spending rose with GDP, the new report says. However, seen as an extension of his previous freeze, this new proposal would save only $200 billion over 10 years, according to the report. In his speech, Obama offered another estimate, placing the 10-year savings at $400 billion.
Whether the freeze would continue for the length prescribed is also unclear. As the report notes, the freeze must be re-approved every year, given the nature of the budgeting process. As Obama's program would affect only discretionary spending, it wouldn't touch Medicare, Medicaid, Social Security, the Defense Department or Homeland Security, Bloomberg News notes.
Republicans have criticized Obama's proposal as inadequate. Another proposal, advanced in December, would cut such discretionary spending to 2008 levels. While Obama's freeze would keep that level at around $520 billion, a return to the 2008 level would mean cutting back to to about $392 billion, according to Bloomberg.
With the five-year freeze, the government would spend $500 billion more than if it returned to 2008 levels, according to the Goldman report.
"Freezing after the last two years' spending binge is clearly not much," Senate minority leader Mitch McConnell (R-Ky.) told HuffPost's Ryam Grim.
Economist Paul Krugman, by contrast, saw the freeze as yielding an inconsequential savings, compared to its potentially destructive impact.
"It's both trivial in fiscal terms and likely to inflict some real harm on government effectiveness," he wrote.
THE HUFFINGTON POST