Analyst view: Obama to seek 3-year freeze on domestic spending

(BestGrowthStock) – President Barack Obama, under pressure from deficit hawks, will seek a three-year freeze on domestic spending in his 2011 budget that would save $250 billion by 2020, administration officials said on Monday.

Obama will outline the spending hold-down in his State of the Union address on Wednesday and will spell it out in detail on February 1, when he unveils his second budget.

Here are some analysts’ views from Asia-Pacific on his proposal:

SELENA LING, HEAD OF TREASURY RESEARCH, OVERSEA-CHINESE

BANKING CORP, SINGAPORE

“At the end of the day, people would like to see discretionary spending cut back but it’s a bit vague.

“There are other parts of the mechanism that are also moving — the healthcare reform bill he’s trying to push through, the $80 billion stimulus package that is meant to create jobs — so you have to see how they work together.”

DONG TAO, CHIEF ECONOMIST FOR NON-JAPAN ASIA AT CREDIT

SUISSE, HONG KONG:

“Most of the U.S. government spending is not exactly where Asia’s exports are heading to. So the relative impact to Asia’s exports will not be as big as if the U.S. consumers decide not to spend.

“I do think Asia will be able to manage high end of single- digit of export growth. This (plan) may have a little bit of an impact but probably it is below 2 percentage points. I would be much more worried if the U.S. consumers said they were going to freeze spending instead of Uncle Sam.”

YUJI SAITO, DIRECTOR FOR FX DEPARTMENT, CALYON, TOKYO

“The U.S. needs to show a roadmap of how it will reduce the budget deficit at some point. Otherwise, from the point of view of budget discipline, a negative rise in longer-term Treasury yields could lead to a sell-off in the dollar and U.S. shares.

“But it’s hard to gauge at the moment what the impact on the currency market is likely to be from the proposals.”

MICHAEL KATZ, ECONOMIST AT FORECAST IN SYDNEY

“We doubt it will make any visible dent in the deficit projections — that requires spending cuts and tax raises, not just spending freezes.

“However, it appears that the market is looking for an excuse to rally and following talk of Bernanke’s re-appointment as Fed Chairman, this could have positive short term effects on sentiment. I think the market is looking for some signs that the budget won’t get out of control, and this news is probably seen as reducing budget blow out risks.

“But we think that a freeze is not enough if the ‘jobless recovery’ continues, with actual spending cuts (not freeze) and tax hikes then necessary to limit budget risks.

“The news of a spending freeze, in our opinion, will have little impact on the U.S. dollar or economy in medium term.”

DAVID COHEN, DIRECTOR, ACTION ECONOMICS IN SINGAPORE

“It was a wakeup call that Obama had to change his game plan a little bit … He had to retreat a bit from the whole health care and come up with some fiscal discipline.

“The markets would probably view this in a positive light. Perhaps he can execute this change of course successfully on the political front. But certainly the market welcomes anything that contains spending and controls the deficit.

“This (budget freeze) would would clear one of the clouds hanging over the U.S. economy. The fact that the budget deficit is something unsustainable at the current level. A lot will hinge certainly whether the economy picks up. The government revenue will depend on economic growth, but so far that is going alright.

“The economic recovery appears to remain on track. But at the same time they would need to exercise some spending discipline.

“Indirectly, the budget freeze would help keep interest rates low in the U.S. That would help rates lower around the world. On the margin, lower rates in the U.S. would be helpful to the debt market globally.”

PARK SANG-HYUN, CHIEF ECONOMIST AT HI INVESTMENT &

SECURITIES, SEOUL

“The budget freeze in the United States, along with the latest tightening moves by China, will hurt the South Korean economy, if not cripple all the recent recovery momentum.

“The global economy still needs government spending to stay on the recovery path. The liquidity control plans in major export markets for South Korea will likely pose some threat and keep the economy from expanding at a speedy pace.”

TIM CONDON, HEAD OF ASIAN RESEARCH AT ING BANK, SINGAPORE

“My sense is that policy risk and uncertainty has gone up from last week’s election results and his inability to drum up support for his economic policies.

“The first move was the curtailing bank risk taking and the second is now this. But as always, the devil is in the details.

“All this may have the potential for discouraging investors or making a lot of economic sense. But we have to wait for the details of this.”

MASAFUMI YAMAMOTO, CHIEF FX STRATEGIST JAPAN, BARCLAYS

CAPITAL, TOKYO

“The initial impression is that this is aimed at Congress, since the Republicans (favor) small government.

“Reductions in fiscal spending would be positive for the dollar, since fiscal risk premiums would decline. You could also say that behind this is optimism that the U.S. economy will be OK even if spending is curbed.”

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(Reporting by Reuters bureaux; Editing by Jeremy Laurence)

Analyst view: Obama to seek 3-year freeze on domestic spending