President’s State of the Union and Budget Deficit Outlook
The President’s State of the Union address took a conciliatory approach and provided an indication of his budget proposal. This included a freeze on government spending in certain areas for five years and other cuts. President Obama stated this would cut $400 billion from budget deficits over a decade.
As the chart below shows, as of September 2010, the U.S. deficit is nearly $14 trillion with the most of the loans (42.2%) being provided by U.S. individuals and institutions. Contrary to popular belief, China does not hold the majority of U.S. debt. Rather, China holds about 7.5% or over $1 trillion being the largest foreign holder of U.S. debt.
Social Security Trust Fund is the second largest holder of U.S. debt at 17.9% of total U.S. debt or $2.4 trillion, which means that the budget may actually be $16 trillion or $2.4 trillion higher.
President Obama also offered some potentially appealing proposals to his newly empowered Republican Congress — a corporate tax cut, reform of the tax code and an end to earmarks with a promise to veto all bills with earmarks. However, these reductions in revenues provide challenges to debt service as mandatory spending quickly approaches revenues. This leaves discretionary spending to be paid through increases in public debt or increased taxes, both of which are opposed by the newly elected Republican majority. Thus, the outlook looks bleak with cuts in spending expected. California has already imposed mandatory furloughs on all state workers to meet tough budget times, and it is uncertain what cuts are on and off the table for the federal government.