New federal budget will set the tone for a new era

It's budget season again in Washington, and you know what that means: rhetoric for dollars as grown men and women make deals, cajole each other, vote for things they don't want and oppose things they do, and practically do back flips to get their version of the budget written into law.

Economic conservatives, who include most Republicans, want you to believe that economic liberals, many of them Democrats, are the big spenders, but nothing could be further from the truth. There are at least as many Republican pet projects and constituent programs in the federal budget as there are Democratic ones.

A line-by-line review

We will receive ample evidence demonstrating the above when the Obama administration begins its line-by-line review of the budget and starts to eliminate needless, wasteful government programs. And we'll be amazed at how many of these obsolete programs favor Republican Party constituencies. Contrary to their "cut government spending" mantra, Republicans are very quick to talk about "a vital government service" or how "this agricultural subsidy protects the American farm" and so on. In fact, all these programs do is protect a political constituency.

Look for President Obama to buy none of it, and for obvious reasons: his administration has to cut about $200-$300 billion from the administration's $3.67 billion fiscal 2010 budget if it hopes to achieve its goal of cutting the budget deficit by more than half to $533 billion by fiscal 2013. In a few weeks, a House-Senate conference committee is expected to send a reconciled version of the budgets each chamber passed to Obama's desk, but don't think Obama is opposed to a veto. Given his party's solid majority in the House and near-filibuster-proof majority in the Senate, it is conceivable that Obama could veto a budget with not enough cuts that he likes, and force lawmakers to send him one he likes better.

Budget: A political document

Although the task of cutting the budget deficit has been made much more difficult as a result of funds needed to stabilize the banking system, most budget watchers agree that there's still room to make cuts totaling at least $100-150 billion; $200 billion if defense is included in the cuts.

Moreover, no budget area is considered sacred, although it is unlikely that entitlement reform (Social Security, Medicare, Medicaid) will be addressed this year. What will be addressed? Low-bid or non-competitive contacts. Non-competitive contracts soared during the Bush administration from about $66 billion in 2000 to about $139 billion. Most favored (surprise) Republican Party constituencies, but some did benefit Democratic Party constituencies, as well.

Are no-bid or low-bid contracts consistent with a free-market system? Hardly, and the difference, some argue, is overpayment to these contractors -- in other words, a federal subsidy. Look for the Obama administration to eliminate needless spending in this category and to shift the most essential services to civil service-based programs administered by Cabinet departments and federal agencies.

The Pentagon may see additional minor cuts, but given that Defense Secretary Gates has already axed all but four new F-22 Raptor fighter jets from Lockheed Martin(LMT), don't look for any more substantive defense cuts; this year's defense budget should total about $534 billion.

Policy Analysis: The budget deficit is large, but manageable. President Obama has already faced down bigger challenges in successfully securing a fiscal stimulus package and most of his budget outline, although his effort to cut agriculture subsidies and several other discretionary programs will probably not succeed, due to opposition from both Republican and Democratic constituencies. In fact, his biggest problem may be reining in liberal House Democrats, who want deeper cuts to pet Republican programs. Obama will have to mollify their concerns while still retaining a strong coalition for upcoming legislation on universal heath care, energy and, if needed, another fiscal stimulus package in the fall.

In general, though, look for Obama to stick to his guns. That's because this year's budget is actually a de-facto two-year budget. Historically, Congress gets very tentative about implementing major budget changes in a Congressional election year, preferring instead to "add a little more here, take a little from over there," meaning the more substantive cuts need to come now.

Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.

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