Washinton Watch #2
Washinton Watch #2
Washinton Watch #2
Washington Watch
Katherine Klingensmith, strategist, UBS FS
The state of the State of the Union [email protected], +1 415 963 5387
The day after the President's State of the Union address, the non- Fig. 1: Unemployment still high
partisan Congressional Budget Office (CBO) estimated that the Nearly half of the unemployed have been out of
federal deficit would be USD 1.5 trillion for the 2011 fiscal year, up work for more than six months
12
to 9.8% of the GDP. Republicans and Democrats alike are discussing
how to limit these numbers, but with very different and potentially 10
new spending in areas such as infrastructure and education as 1970 1980 1990 2000 2010
This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures that begin on
page 4.
Washington Watch
Five-year freeze on discretionary spending Fig. 2: Public debt approaches debt ceiling
The President previously proposed a three-year freeze on discre- US statutory debt limit and debt outstanding, in tril-
tionary spending last year, and he now suggests a five-year freeze. lions of USD
16
This could be important over the long term; however, an ever-in-
creasing percentage of the federal budget is made up of non-dis- 14
ing up roughly with GDP growth, this could save as much as USD 1 6
trillion over the next ten years. In and of itself, even if a full freeze 4
were respected over five years, the US would still need to implement 1995 2000 2005 2010
Tax policy
The deficit commission, which issued its report in December, sug-
gested lowering the corporate and individual tax rates and elimi-
nating virtually all loopholes, with the effect of increasing overall
revenue. President Obama suggested simplifying the corporate tax
code, but, importantly, he proposed making this revenue neutral.
While this could help some companies not currently receiving many
benefits, it will inevitably hurt other companies and industries. Giv-
en that some industries stand to lose, we think the likelihood of this
overall proposal being implemented is low. Although about a third
of S&P 500 profits are from overseas, profits are wholly subject to
US tax policy. As long as the overall proposal is tax neutral, it is also
likely to have no effect on overall US corporate profitability.
Additional spending?
Already the House is busy passing proposals with much more am-
bitious cuts to current federal government spending. While these
proposals at the current juncture do not have a chance of passing
the Democrat-controlled Senate, the mood on the Hill has changed
since the last session of Congress. The President proposed addi-
tional spending on infrastructure, transportation and education.
What these initiatives entail and cost will likely be spelled out in the
President's budget, due the second week of February. Given House
Republicans' reluctance to spend more money, it will be very difficult
to pass any major new legislation involving significant expenditures.
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