From Barrons.com:

Barack Obama, the Fiscal Conservative?

The Democrat would do a better job of reining in the budget deficit than his GOP competitor, says First Global.

First Global

ON THE EVE OF THE U.S. presidential election, we thought it instructive to look at how the US budget has looked under a Democratic versus a Republican White House. With the caveats that economic cycles bring their own head and tailwinds and 'past performance may not be indicative of the future', the analysis of the last two decades is certainly interesting.

When Republican candidate, George W. Bush took over as president in January 2001, he inherited a budget surplus of $236.2 billion in the fiscal year 2000. In fact, the federal budget was in surplus for four consecutive years, 1998-2001, following 30 years of running budget deficits. In contrast, when Democratic candidate, Bill Clinton took over as President on January 20, 1993, he inherited a budget deficit of $290.3 billion in 1992, built up under the regime of the then Republican President, George H.W. Bush - the father of the current president.

The legacy of the current Bush presidency means that the incoming president will need to work hard to reduce the federal budget deficit. No matter which way you cut the data, the Democratic regime wins hands down, primarily due to the huge difference in expenditures on military defense and receipts from individual taxes, based on policy differences between the candidates.

The US national debt (which represents an accumulation of yearly budget deficits) has touched $10 trillion, on the budget year ending September 2008, with a cumulative growth of 72.6% during the Bush regime, as against a cumulative growth of merely 28.6% at the time of the Clinton's regime.

The continuously declining budget deficit during the Clinton regime reflects the impact of various major legislations signed by him, such as the "Omnibus Budget Reconciliation Act of 1993" raising the income tax rates, the "Minimum Wage" Increase Act of 1996, etc.

On the other hand, the sharp decline in the budget deficit during the Bush period can be attributed to two reasons -- declining tax rates and the Iraq war.

The high U.S. budget deficit is not popular due to a number of reasons. Firstly, the higher the government expenditure, the lesser the available resources for private investment, which is popularly known as the "crowding-out" effect in Keynesian language.

Secondly, though expansionary government policies become an inevitable tool to boost the domestic economy amidst tough times, investors punish the largest deficit running government in the longer term, as the deficit adversely impacts credibility and increases the risk of default by that government, since it is consuming resources faster than other governments.

Thirdly, if a government is spending more than it has, then it will finance the over-expenditure in two ways -- (i) borrowing and; (ii) printing money. Both of these moves could prove dangerous, as borrowing by issuing government securities will reduce money supply in the market and seigniorage will increase money supply. An excess of either could prove disastrous for the economy (in fact, the entire world is facing a liquidity crunch in the market currently).

Despite governments across the world committing trillions of dollars to save their banking systems, there are some limits as to how far they continue doing so, since in the longer term, investors may punish those nations with higher deficits on their government budgets. The problem for the U.S. is that it started on an already high base of budget deficits and national debt and these would only push it higher. As the situation stands, the incoming Presidents will have an uphill task to reduce the federal budget deficit (let us forget the balanced budget for now).

Republican candidate, John McCain, has a big disadvantage here, as he has backed Bush's tax cuts for the rich and now wants to provide them with bigger tax cuts. Moreover, John McCain was gungho on the Iraq war from the start, while on the other hand, Barack Obama is opposed to both these policies. Hence, our vote goes to Barack Obama, a Democratic candidate, at least in terms of fiscal discipline.