Fiscal talks fail, US stumbles towards cuts

RICHARD COWAN AND JEFF MASON
Last updated 07:34 02/03/2013

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The US government stumbled headlong toward wide-ranging spending cuts that threaten to hinder the nation's economic recovery, after President Barack Obama and congressional leaders failed to find an alternative budget plan.

The inflexible plan, locked in during a bout of deficit-reduction fever in 2011, initiates time-released cuts that can only be halted by agreement between Congress and the White House.

A deal proved elusive in talks at the White House on Friday, meaning that government agencies will now begin to hack a total of $85 billion from their budgets between now and October 1.

Democrats predict these cuts could soon cause air traffic delays, furloughs for hundreds of thousands of federal employees and disruption to education and law enforcement.

The full brunt of the automatic cuts will be borne over seven months, and Congress can stop them at any time if the two parties agree on how to do so.

But Obama was resigned to budgets shrinking.

"Even with these cuts in place, folks all across this country will work hard to make sure that we keep the recovery going, but Washington sure isn't making it easy," he said after meeting Republican and Democratic congressional leaders.

Given the absence of a deal, Obama is required by midnight to issue an order to federal agencies to reduce their budgets in a process known as "sequestration." The White House budget office must send a report to Congress detailing the spending cuts.

The stalemate in Washington didn't appear to affect US stocks, with the Dow Jones Industrials up 45 points shortly after midday on Friday, recovering from earlier losses on encouraging manufacturing data.

FURLOUGHS LOOM

In coming days, federal agencies are likely to issue 30-day notices to workers who will be furloughed.

"Not everyone will feel the pain of these cuts right away. The pain though will be real. Beginning this week, many middle class families will have their lives disrupted in significant ways," Obama told journalists in the White House.

Democrats insist the solution include bringing in additional revenue through closing what they call tax loopholes that largely benefit the wealthy and US corporations. Republicans reject this approach.

"The discussion about revenue, in my view, is over. It's about taking on the spending problem," House of Representatives Speaker John Boehner said on leaving the meeting.

The International Monetary Fund warns that US economic growth could be slowed by 0.5 of a percentage point this year, hitting the global economy.

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The non-partisan Congressional Budget Office predicts 750,000 jobs could be lost in 2013 and federal employees throughout the country are looking to trim their own costs.

"The kids won't go to the dentist, the kids might not go to the doctor, we won't be spending money in local restaurants, local movie theaters," said Paul O'Connor, president of the Metal Trades Council, which represents some 2,500 workers at the Portsmouth Naval Shipyard in Kittery, Maine.

In the absence of any deal at all, the Pentagon will be forced to slice 13 percent of its budget between now and September 30. Most non-defense programs, from NASA space exploration to federally backed education and law enforcement, face a nine per cent reduction.

Both sides still hope the other will either be blamed by voters for the cuts or cave in before the worst effects predicted by Democrats come into effect.

No matter how Obama and Congress resolve the 2013 battle, this round of automatic spending cuts is only one of a decade's worth of annual cuts totaling $1.2 trillion mandated by the sequestration law.

- Reuters

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