On Obama’s 2013 Budget & the Crisis in Greece
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Obama’s 2013 Budget Targets the “Rich”
2. Is a Greek Debt Default Inevitable?
3. Greek Parliament Approves Latest EU Bailout Demands
4. Default Averted For Now, But Elections Loom in April
Some weeks there is so much to write about, it is difficult to know where to start. Today, for example, it is so tempting to write about President Obama’s attempt last week to require the Catholic Church and all of its hospitals and universities to provide free birth control, abortion and sterilization for women, only to walk it back a few days later.
While many Americans viewed Obama’s reversal as a victory, it was not. Unwilling to accept defeat, Obama merely shifted this healthcare burden to the health insurance companies. Does anyone believe the insurance companies are going to provide all these extra services for free? Not! I could write for hours on this topic, but I will leave that to others.
Instead, we’ll focus on President Obama’s new federal budget proposal for fiscal 2013 which was announced on Monday. It’s an annual ritual for me to criticize presidents’ budgets that increase spending every single year. For newer readers, please note in advance that I criticized every one of President George W. Bush’s budgets for eight years, so I’m not breaking new ground today.
Following that discussion, I will share my thoughts on the latest decision by Greece’s Parliament on Sunday night to approve a new round of severe austerity measures and spending cuts in order to receive yet another huge bailout loan from the European Union and the IMF.
Obama’s 2013 Budget Targets the “Rich”
Yesterday morning the Obama Administration unveiled its federal budget request for FY2013 which begins on October 1. As expected, the budget request was record-large at $3.8 trillion, up from $3.73 trillion in the request for FY2012. The latest budget forecasts a federal deficit of $1.3 trillion for FY2012. That will make a record four consecutive annual budget deficits over $1 trillion under Obama. The budget deficit estimate for FY2013 is $901 billion. We’ll see.
The latest budget was seen by many as a re-election campaign document in that it frames Obama’s economic pitch to voters and seeks to shift the focus from deficits to economic growth. The myriad of tax increases embrace his recent theme of “fairness" and “shared responsibilities.”
The president’s annual budget request is only that - a request. Congress is under no obligation to accept the president’s annual budget request. However, Congress is required to at least give it an up or down vote. Typically, the vote is down since members of Congress prefer to craft their own budgets for federal spending each year - at least until the last few years, that is. The Democrat-controlled Senate, for example, has not been able to produce a federal budget in almost three years, which is an embarrassment.
Last year, Obama’s record-large budget request of $3.73 trillion for FY2012 was roundly rejected in the Senate by a vote of 97-0! The budget request the Obama administration released on Monday, which is even bigger and more complex, is likely to face a similar fate. Even if it is voted down, Congress will come up with something similar, sadly.
As the new budget was rolled out yesterday, President Obama called for aggressive spending to boost economic growth and for higher taxes on the “rich” – those individuals making over $200,000 a year and families making over $250,000 a year. For them, the Bush tax cuts will disappear at the end of this year (unless Congress votes to extend them).
Never mind that those making $200K/$250K a year make up just 3% of all taxpayers, and this 3% pays more in taxes than the other 97% combined!!
The president’s new budget would also change the tax code such that dividend income, now taxed at 15%, would be taxed as ordinary income. Currently, dividends are taxed at the corporate level at a maximum rate of 35%, then taxed again at 15% at the individual level. That’s a 50% combined tax rate.
Under Obama’s budget and the already-passed Obamacare law, the effective maximum tax rate on dividends would soar to 78.4%, of which 35% is corporate tax rate, 39.6% is personal tax rate and the upcoming 3.8% Obamacare rate for couples with investment income over $250K.
Popular tax deductions such as mortgage interest and charitable giving would be “capped” for those making over$200K/$250K a year. These changes, Obama promises, would increase government revenues by $1.5 trillion over a decade.
Compare the projected savings of $1.5 trillion over 10 years – which won’t happen by the way – to the deficit of $1.3 trillion this year alone. Obama knows well that raising taxes on those making $200K/$250K won’t close the budget gap.
Although not officially in yesterday’s budget, Obama still plans to impose the so-called “Buffett Rule” which would require any person or household making $1 million or more a year to pay at least 30% of that in income taxes. Obama also wants “carried interest” taxed as ordinary income rather than at the capital gains rate of 15%, a move aimed at hedge fund managers and other money managers.
The latest budget includes an extra $800 billion in spending for infrastructure, education, manufacturing, job training, etc., with an extra $30 billion for hiring more teachers and first responders. Another $476 billion is in the budget proposal for a six-year plan to improve surface transportation, which is a big increase over current levels and much more than other proposals being considered in Congress.
At the same time, the White House had to comply with the spending caps enshrined in the Budget Control Act last year, which total in the neighborhood of $1 trillion in discretionary spending cuts over a decade. The budget details 210 places where programs will supposedly be cut or eliminated, for savings of $24 billion in 2013 and $520 billion over a decade.
The president’s budget does little to address how to curb the growth in entitlement spending. The budget would cut only about $360 billion from Medicare, Medicaid and other health programs over a decade. That’s a drop in the bucket when compared to the rapid expansion of costs expected for entitlement programs. As a result of the failure to address entitlements, our annual budget deficits will be more than $500 billion a year over the next decade.
A couple of final points about the new budget and 10-year projections:
1) A spending cut is not always a spending cut. Due in large part to “baseline budgeting,” funding for the various government agencies rises every year, in most cases. If lawmakers merely slow the rate of growth in funding, they can (and do) claim that this is a spending cut. Only in Washington!
2) These budget proposals almost always include economic assumptions that are too optimistic. In Obama’s latest budget, they estimate that GDP will rise to 4% in 2014 and remain at least that level until 2022. And no recessions between now and then either. Reminder: I criticized George W. Bush for doing the same thing in every one of his budgets as well.
Is a Greek Debt Default Inevitable?
The answer is YES, but last Sunday night the Greek Parliament pushed the day of reckoning down the road for a while longer, assuming there is enough infrastructure left that has not been burned down by angry mobs all across Greece as we saw last weekend. Today, let’s step back and look at what has happened in Greece in recent months and what is likely to happen just ahead.
Concerns over the European debt crisis had abated in the last 2-3 months after the European Central Bank took measures (in effect, quantitative easing) to recapitalize its major banks. However, events over the last week have focused on Greece (surprise, surprise) and renewed fears that it would default on its debt on or before March 20.
The Greek debt crisis, as you know, has been unfolding for over two years with multiple European Union and IMF bailouts. Until recently, EU leaders have been resolute in their efforts to avoid a Greek default and its ouster from the EU and the euro. That position seems to have changed very recently, specifically last week.
For weeks now, Greece has been negotiating for a new EU/IMF bailout loan of €130 billion ($173 billion) to avoid a bankruptcy next month that could send shockwaves through the global financial markets. The EU/IMF demanded that Greece implement additional austerity measures and deep spending cuts in return for the new bailout loan.
Greece reluctantly agreed to the terms, including a haircut of up to 70% for Greek bondholders (including numerous major European banks), despite widespread protests and violence occurring in cities within Greece. Early last week, it looked as though the deal would get done.
But as Greece’s Prime Minister finally agreed to the terms dictated by the EU/IMF, the EU/IMF tossed in a surprise requirement for even more concessions at the last minute. Greece would have to agree to additional spending cuts of €325 million this year alone. Furthermore, Greece would have to provide ironclad promises that all of these austerity measures and spending cuts would be enacted regardless of the outcome of Greece’s government elections just ahead.
The fact that the EU/IMF changed the terms of the deal at the last minute has set off increased riots and protests within Greece. Several high ranking members of Greece’s government have resigned. Over the weekend, the future of Greece’s leadership hung in the balance. No one knew what would happen next. This explains why global equity markets sold off last Friday.
The fact that the EU/IMF changed the terms of the latest agreed upon bailout deal at the last minute calls into question whether or not European leaders would now just as soon see Greece default and leave the Eurozone. While Greece is a very small country, a default on its debt next month would have major market implications, too many to discuss in this limited space.
Greek Parliament Approves Latest EU Bailout Demands
A majority of Greece’s Parliament voted to accept the EU/IMF’s latest bailout demands at midnight on Sunday (Greek time). This key vote was watched closely by news sources around the world. Had Greece’s Parliament voted down the bailout measures, a default by Greece was almost a certainty.
The latest round of austerity measures includes implementing additional steep cuts in private sector wages, sacking public-sector workers and additional deep government spending cuts this year alone.
If you watched any news over the weekend, you probably saw that hundreds of thousands of protesters filled the streets of downtown Athens rioting and burning down dozens of buildings, including several historic sites near the Parliament building. It was extremely chaotic.
Sunday's protesters included trade unionists, youths with shaven heads waving Greek flags, communist activists and left-wing sympathizers, many of them equipped with gas masks.
They denounced what they described as “blackmail” being imposed by the international troika of the EU, the IMF and the European Central Bank in return for the bailout.
Because the Parliament voted in favor of the additional austerity measures, despite the mass protests, that paves the way for the next EU bailout loan of €130 billion. And just in time. This Friday, February 17, Greece is planning to make a final bond-exchange offer to its private sector bondholders. It is expected that private sector bondholders will be asked to accept a roughly 70% haircut on the value of their bonds.
The bond exchange offer to private sector creditors is designed to shave apprx. €100 billion off of the country’s €360 billion debt. The bond swap exercise is expected to run for about three weeks, but it could take even longer if there are collective-action [class-action] legal filings.
Following that, on March 20 Greece must pay back an outstanding €14.4 billion bond that it can’t pay without the new bailout loan from its European partners and the IMF. Following the Parliament vote Sunday night to accept the latest austerity measures, it would seem likely that the new €130 billion loan will be in place ahead of the March 20 bond redemption.
Default Averted For Now, But Elections Loom in April
Parliamentary elections are scheduled to be held in Greece in April of this year. They were originally scheduled to be held in 2013 in accordance with the constitution; however, due to an agreement to form a new coalition government in November 2011 in order to ratify and implement the decisions agreed to with other Eurozone countries and the IMF in October, one of the conditions was to hold an early election.
It is almost a given that most Greek leaders will be ousted from office in the April elections, especially in light of the mass protests that played out all across Greece last weekend. Those legislators that were hunkered down in the Parliament last weekend had to know that their vote in favor of the latest round of austerity measures was a death threat, politically speaking.
Conditions in Greece were already dire even before Sunday’s passage of the new austerity measures. Last week, Greece reported that its GDP was down 11.3% from the same month a year earlier. Unemployment just hit 22% and is almost 50% among young people. With the new austerity measures, there will be a 22% cut in the minimum wage, pension cuts of $396 million, a freeze on private sector salaries and reportedly a cut of 150,000 from a public sector of 800,000 employees.
Given that the Greek people will very likely vote most of their current leaders out of office a couple of months from now – presumably replacing them with a new cast that agrees with them – this raises serious questions. Most notably, will the new leaders vote to overturn the latest round of austerity measures and spending cuts adopted on Sunday?
It will be very interesting to see how the EU/IMF structures the new bailout loan of €130 billion. Will they give it all to Greece at once, what with elections coming up in April? Or will the bailout be given in stages? At this point, we do not know. EU leaders are scheduled to meet in Brussels tomorrow to discuss the terms of the bailout loan.
Either way, Greece will find itself on the edge of default once again, perhaps before the end of this year. While the spotlight may be off of Greece for a while, there will be another crisis and another bailout will be needed. In the meantime, keep an eye on Portugal which may be the next flashpoint in the European debt crisis.
Happy Valentine’s Day,
Gary D. Halbert
Obama’s big-spending election-year budget
Greek Bailout Won’t Work in the Long Run
Greece: A reprieve, nothing more
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