Is the US government going to stop spending?

The US economy is the largest and most influential economy in the world. The old saying “if the American economy sneezes the rest of the world catches a cold” is as true today as ever. When president Obama came into power with a landslide victory the democrats extended their majority in both the House of Representatives and the Senate (similar to House of Commons and House of Lords). With this suitable majority the Obama administration was able to successfully pass the largest ever stimulus package: the American Recovery and Reinvestment act, which pumped $787 billion into the US economy. Moreover, he managed to pass healthcare reforms and extend benefits to unemployed Americans, which in turn helped the US economy out of their deepest recession since the great depression in the 1930s.

However, in November of this year, the US populace go back to the polls to vote in the mid-term elections, in which all seats in the House and a third of the seats in the Senate are up for grabs. There is currently a large political backlash against a variety of Obama’s spending policies, especially by the conservative right in America, which could lead to a republican majority in the House of Representatives. If this occurs the American political process will be at a standstill as the republicans, who are traditionally fiscal conservatives, will be able to prevent any new spending policies by the president and the democrat government.

If the republicans manage to gain power the new spending policies by the democrats will almost certainly be blocked by the republican majority in the house. This lack of government expenditure in the economy could lead to a slow down in the economic recovery of the US and this would have a dramatic impact on the rest of the world. This is because the US consumer is the backbone of the global economy.

On the other hand, the American debt currently stands at approximately $13 trillion and the yearly budget deficit is in the region of $1.3 trillion. This has led many economists to suggest that paying down the deficit is the number one priority for the US government. This message is echoed by many of the average American’s who see the current spending by the US government as reckless, unnecessary and ineffective.

Without a doubt long-term debt reduction should be the aim of the US government; nevertheless the pure scope and depth of the recession in the US means that removing stimulus measures too soon could seriously damage the strength of the recovery.

We currently reccomend the Neptune US Opportunties fund in our Cautious, Balanced and Adventure portfolios.