The President of the United States delivered a $3.8 trillion Federal budget proposal today that for the fourth year in a row outspends the nation's projected tax receipts by at least 25%. Although the projected deficit for fiscal year 2013 is "down" to $900 billion from $1.4 trillion a year ago, this election year package of tax increases and spending cuts is being attacked from all sides.
Even before the ink had dried, Republicans were calling it a "completely political document," while White House aides fired back, arguing that now is not the time for austerity.
Jeff Kleintop, chief market strategist at LPL Financial calls it the toughest collection of tax hikes and spending cuts since 1947. "This is brutal," he says of the President's plan, "this is a blunt instrument being directed at the economy."
In fact, without big changes (that are widely seen as politically unlikely this year) Kleintop says the estimated impact of a $500 billion or 3.5% hit to the economy could push the country back into recession next year.
Highlights of the plan (or lowlights, depending on your point of view) include the expiration of the so-called Bush tax cuts, as well as the stratification of the capital gains tax, that would reduce or eliminate it for lower income households, while raising it for those who earn more than a million dollars a year, taking it from 15% to as much as 39.6% - the proposed new top bracket for ordinary income.
While a majority of the reductions were mandatory and predetermined by both last year's budget agreement and the failed negotiations of the "Super Committee," defense spending is set to take some of the largest hits, at nearly $500 billion over the next decade.
What is clear is that even if fairly rosy economic goals are met, Americans shouldn't expect to see a balanced budget at least for another decade, and probably even longer. With interest payments and entitlement spending currently accounting for 64% of federal spending, that leaves a small slice of the pie that can even actually be targeted for belt tightening.
"We're a bit worried about the outlook for profits and the economy as we look out 12 months from now ," Kleintop says, adding that other than an extension of the payroll tax cuts that are currently pending, Congress will be unable and/or unwilling to avert this looming hit to the economy during an all-important election year.
Do you think the need to balance the budget and pay down the debt is more important than keeping the economy from slipping back in to recession?
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