Obama to Call for Five-Year U.S. Federal Spending Freeze

President Barack Obama will propose tonight a five-year freeze of non-security discretionary spending as a way to reduce the federal budget deficit.

Obama plans to offer the freeze in his annual State of the Union address to Congress, Melody Barnes, director of the president’s domestic policy council, said in a Bloomberg Television interview. It would extend a three-year freeze Obama proposed last year by an additional two years. He also will endorse a proposal by Defense Secretary Robert Gates to cut $78 billion from the Pentagon budget over five years, Barnes said.

At the same time, Obama will tell the nation that both parties must work together on accelerating the U.S. recovery and maintaining the nation’s competitiveness in the global economy, in part by investing in infrastructure and research.

“At stake is whether new jobs and industries take root in this country, or somewhere else,” Obama will say, according to excerpts released by the White House. He compared the challenges faced by the U.S. to when the Soviet Union launched the world’s first artificial satellite.

“This is our generation’s Sputnik moment,” he will say.

Obama’s proposal for a spending freeze sets up a conflict with congressional Republicans, who have called for spending to be rolled back to fiscal 2008 levels, before government actions to combat the financial crisis and the recession.

Deficit Reduction

The freeze would trim the federal deficit by $400 billion over 10 years, said an administration official, speaking on condition of anonymity. It wouldn’t apply to spending for Social Security, Medicare, Medicaid, Homeland Security, the Defense Department or interest payments on the national debt. Discretionary spending outside security accounts for about 14 percent of Obama’s budget.

Republicans said Obama’s plan falls short of what’s needed to rein in the deficit and repeated their vow to slash non- security spending this year, a pledge they used in the November elections that gave them control of the House of Representatives. The House today voted 256-165 to endorse a nonbinding resolution reaffirming that goal.

$100 Billion

Fulfilling the Republican promise would mean cutting by about $100 billion Obama’s fiscal 2011 budget blueprint, which proposed spending of $3.84 trillion. Of that, $520 billion was in discretionary spending outside defense and security and the deficit was projected to be $1.4 trillion.

In fiscal 2008, the government spent $2.98 trillion with a deficit of $459 billion. Non-security discretionary spending that year amounted to $392 billion. Republicans haven’t specified what they would cut to reach that level. In their campaign “Pledge to America,” the Republicans said they would impose unspecified budget caps to limit federal spending in future years, without saying how much the deficit would be reduced.

Senate Republican leader Mitch McConnell of Kentucky said Obama’s freeze leaves government spending too high.

“The problem is it freezes in place the extraordinary spending increase of the last two years,” McConnell said.

Obama is scheduled to present his budget for the next fiscal year the week of Feb. 14.

Treasuries advanced on speculation about the freeze. The 30-year yield tumbled as much as nine basis points, the most on an intraday basis since Dec. 31, before trading at 4.49 percent at 5:15 p.m. in New York, down seven basis points, according to BGCantor Market Data. A basis point is 0.01 percentage point.

Entitlements

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan advocacy group in Washington, said both Obama’s and the Republican plans fail to address the growth of mandatory spending in the entitlement programs, Social Security, Medicare and Medicaid. Those three represent about 40 percent of the total federal budget.

“To continue to ignore the elephant in the room -- entitlement reform -- will leave the job unfinished,” MacGuineas said in an e-mail.

Adding to the fight over the budget, his advisers have said the president will make the case for continued investment in education, infrastructure and research.

‘Terrible Mistake’

Austan Goolsbee, chairman of the White House Council of Economic Advisers, said in a Bloomberg Television interview that cuts in “those things that keep us competitive, like the education of our kids, like research and development, like the infrastructure,” would be a “terrible mistake.”

Obama has said those areas are key to bring down the unemployment rate, which was 9.4 percent last month.

Still, Goolsbee said, “everybody agrees on both sides that for the fiscal situation facing the country over the medium run we need to make cuts. The question is, ‘where do you make the cuts?’”

He also said Obama would consider lowering corporate taxes, among a variety of proposals to boost the economy.

Goolsbee said the U.S. corporate tax code is full of “a lot of loopholes and carve-outs,” and Obama “would be open to broadening the base and lowering the rate to make American companies that are competing with companies from abroad more competitive.”

Tonight’s address will feature an audience configuration. As a symbolic show of unity after the shootings in Tucson, Arizona, that killed six people and wounded 13, including Democratic Representative Gabrielle Giffords, at least 60 senators and representatives have decided to sit with colleagues from the other party. Democrats and Republicans historically have been seated in their own sections of the House chamber for the address.

Senator Mark Udall, a Colorado Democrat who first proposed the idea of bipartisan seating, said at a news conference that the president’s annual address to Congress has become too much like “a high school pep rally.”

Senator Lisa Murkowski of Alaska, one of the Republicans who helped to organize the effort, said she has “two dates.” She’ll sit with Senator Barbara Mikulski, a Maryland Democrat, and Senator Daniel Akaka, a Democrat from Hawaii.

“It’s like going to the prom and who’s wearing what dress,” she said.

To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net; Nicholas Johnston in Washington at njohnston3@bloomberg.net

To contact the editors responsible for this story: Mark Silva at msilva34@bloomberg.net

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