U.S. lurches into new budget crisis, spending cuts imminent

WASHINGTON Sat Mar 2, 2013 5:11am IST

The U.S. Capitol building is seen at sunrise in Washington March 1, 2013. REUTERS/Jonathan Ernst

The U.S. Capitol building is seen at sunrise in Washington March 1, 2013.

Credit: Reuters/Jonathan Ernst

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WASHINGTON (Reuters) - The U.S. government stumbled headlong on Friday toward spending cuts that could dampen the economy and curb military readiness, after President Barack Obama and congressional leaders failed to find an alternative budget plan.

Put in place during a bout of deficit-reduction fever in 2011, the automatic cuts can only be halted by agreement between Congress and the White House.

As expected, a deal proved elusive in talks on Friday, meaning that government agencies will now begin to hack a total of $85 billion from their budgets between Saturday and October 1. Financial markets in New York shrugged off the stalemate in Washington.

Democrats predict the cuts, known as "sequestration," could soon cause air-traffic delays, furloughs for hundreds of thousands of federal employees and disruption to education.

New U.S. Defense Secretary Chuck Hagel said the cuts, half of which will fall on the Pentagon, put at risk "all of our missions.

While the International Monetary Fund warned that the belt-tightening could slow U.S. economic growth by at least 0.5 of a percentage point this year, that is not a huge drag on an economy that is picking up steam.

Obama was resigned to government 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.

At the heart of Washington's persistent fiscal crises is disagreement over how to slash the budget deficit and the $16 trillion national debt, bloated over the years by wars in Iraq and Afghanistan and government stimulus for the ailing economy.

Obama wants to close the fiscal gap with spending cuts and tax hikes, but Republicans do not want to concede again on taxes after doing so in negotiations over the "fiscal cliff" at the New Year.

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

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.

Given the absence of a deal, Obama will issue an order to federal agencies by midnight on Friday to reduce their budgets. The White House budget office must send a report to Congress detailing the spending cuts.

The Justice Department has already sent notices of furloughs that will begin April 21 at the earliest to some 115,000 workers, including at the FBI.

Unlike previous fiscal dramas, the sequestration fight is not rattling Wall Street.

U.S. stocks rose moderately on Friday, with the Dow Industrials closing up 35 points, as data showed manufacturing expanded at its fastest pace in 20 months in February. Despite the market being up more than 7 percent this year, and near a record high, the discord in Washington has not prompted traders to cash in gains.

"Most of us believe that sequestration is not something that will make us fall off the cliff, since the cuts will be worked in relatively slowly," said Bill Stone, chief investment strategist at PNC Wealth Management in Philadelphia.

CANADA FRUSTRATED

Canadian Finance Minister Jim Flaherty expressed rare public frustration with the United States for lurching from crisis to crisis.

Flaherty said he was confident Canada would not suffer too badly from the fiscal troubles its biggest trading partner is suffering from. "It is regrettable, though, that the U.S. continues to move from crisis to crisis in fiscal terms," he told reporters.

Another influential minister in Canada's Conservative government, House Leader Peter Van Loan, took a swipe at the United States, saying it was up to its ears in debt because of big-spending, left-wing policies.

One reason for the inaction in Washington is that both parties 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.

A Reuters/Ipsos poll released on Friday showed 28 percent of Americans blamed congressional Republicans for the sequestration mess, 18 percent thought Obama was responsible and 4 percent blamed congressional Democrats. Thirty-seven percent blamed them all, according the online poll.

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 2,500 workers at the Portsmouth Naval Shipyard in Kittery, Maine.

After weeks of White House warnings about the cuts causing air-traffic chaos, threatening cancer research and keeping law enforcement officers off the streets, Obama acknowledged it might be a while before effects fully kicked in.

"We will get through this. This is not going to be an apocalypse," he told journalists in the White House.

"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 said.

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.

In his first Pentagon news conference since he was sworn in on Wednesday, Hagel struck a more moderate tone than many defense officials who have said the spending reductions would be devastating or could turn the U.S. military into a second-rate power.

"America ... has the best fighting force, the most capable fighting force, the most powerful fighting force in the world," he said. "The management of this institution, starting with the Joint Chiefs, are not going to allow this capacity to erode."

Most non-defense programs, from NASA space exploration to federally backed education and law enforcement, face a 9 percent reduction.

Moving to head off a new budget crisis later this month, Boehner said the Republican-led House would move a "continuing resolution" to fund government through the rest of the fiscal year, thus hopefully averting a government shutdown.

(Additional reporting by Steve Holland, Roberta Rampton and Deborah Zabarenko in Washington and David Ljunggren in Ottawa, Writing by Alistair Bell; Editing by Peter Cooney)

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