What are the Economic Implications of the Obama Spending Freeze?


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President Obama announced yesterday that he will freeze non-military discretionary spending for three years. It’s mostly a political move, but what does it mean for the economy? The Atlantic has some good answers:

The key fact is that non-military discretionary spending today is about 25 percent of the budget. Freezing 25 percent of spending while entitlements grow faster than inflation does not confront our deficit, but it does make the Democratic base really really mad.

Where will the cuts come from?
This is being called a budget freeze, but the biggest parts of the budget won’t feel the frostbite. The exemptions include: security departments like the Pentagon, Homeland Security, the Veterans Administration, and entitlements like Medicare, Medicaid and Social Security. The freeze targets close to a quarter of the yearly budget — departments like Education and Health and Human Services, agricultural subsidies and earmarks. The White House will provide a specific list of possible cuts to adhere to the freeze, but ultimately it will be up to Congress to determine how the money sloshes around.

Will it dent the debt?
A little. The freeze is not — repeat, not — tied to inflation. That means the cuts will get even deeper each year. $15 billion saved next year. Maybe $50 billion the next year, and $75 billion the year after that. The White House is projecting $250 billion saved over ten years. My understanding is that our projected accumulated debt over that time is close to $9 trillion.

Read more about the political implications of Obama’s spending freeze. They will, I assume, be greater than the economic implications.

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