My best estimate has the Reds almost $2M in payroll above where they were last season. A $5M increase over 2011 gives the Reds about $3M left to work with. Based on how much of Ryan Madson's contract counts toward the 2012 budget, they could have several million more. It's still probably not enough to sign Roy Oswalt without clearing out a little salary by trade.
Despite Walt Jocketty declaring that the team is "pretty tapped out" in terms of payroll, Oswalt's people have talked to the Reds on some level (according to John Fay). It's a move I suspect "Win Now Walt" would like to make. All of the eggs for improving the rotation are currently in the Latos basket and the starting pitching depth, especially if you include departures by Maloney and Thompson, has shrunk to essentially Aroldis Chapman. Can we call him a starter yet?
Financials would not be the only complication if the team were seriously pursuing Roy Oswalt (and the team probably isn't, but that's what I thought about Chapman, Latos and Madson, et al.) There's no spot for him currently in the rotation. Mike Leake has options, but his performance last season makes him a lock. Trading Arroyo is nearly impossible, given his contract and status on the team. Homer Bailey, meanwhile, could be converted to set-up reliever or traded to clear salary/space in the rotation. Since a Homer Bailey trade would be unlikely to upgrade left field in a major way this season, the move would be essentially asking: Is Roy Oswalt that much better than Homer Bailey?
The answer would be obvious ("yeah, idiot") if not for the question of Oswalt's health and age. He was poison for the Reds over much of the last decade as an Astro, so it would be poetically satisfying to see his "redemption" in Red. But he pitched only 139 innings last season, the lowest total of his 11-year major league career. He battled a back injury last season and made some remarks which sparked retirement talk, finishing the season with his second-lowest ERA+ ever.
Oswalt would be a significant boost to the Reds, given the right circumstances. Those circumstances would include clean bill of health, some kind of financial windfall for the Reds and a way to make the acquisition add to pitching depth - rather than a one-to-one replacement. That last one could mean parking Homer Bailey in the bullpen, which prompts its own series of questions.
I don't think Oswalt is in the cards. But the fact that he could be on the Cards may have Walt reaching for his budget wand.