Not so long ago (2001), we were struggling to figure out what to do with the (projected, not real) huge surpluses. Fed Chairman Alan Greenspan came up with this argument on May 10, 2001, "I am far more convinced that when confronted with this type of situation (projected budget surpluses) you reduce taxes. You don't increase spending to reduce the surplus." So it is ironical that just a few years later we are trying to massage numbers to make the deficit look smaller than it really is.
Therefore, the budget proposals prepared by the White House have been a disappointment for most business leaders, except for those that are exploring new business opportunities in homeland security and defense. Here are our thoughts on the budget and what you can do to respond:
- The total federal debt would swell to $11 trillion in 2010 from $8 trillion this year. This is not a good indicator of long-term economic health of the United States.
- Little is being done to reduce the budget deficit. If the cost of wars and Social Security privatization is included, the deficit is not coming down anytime soon. This means pressure on the dollar and higher interest rates.
- The budget would make an 11.5 percent reduction in funding for the Department of Housing and Urban Development, squeeze $45 billion in savings from the Medicaid health program for the poor, and cut community development programs by 4.5 percent. While a smaller government may be a good economic principle, some of these services are essential to a society. In many cases, the burden is simply transferred to the states and local governments that raise taxes. The net effect is lower disposable incomes and lower consumer spending.
- When government eliminates programs, it means that jobs will be eliminated and less money will be pumped into the economy. This affects all businesses negatively.
What does it mean for you?
- Prepare for lower consumer spending.
- As businesses fight for lower number of dollars, expect pricing pressure.
- Since state/local taxes may go up, keep an eye on these developments, and relocate your operations accordingly.
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