Bloomberg News

No Agreement on $1.2 Trillion in Cuts as Deadline Nears

February 13, 2013

Congress Lacks Plan to Halt Spending Cuts as Deadline Nears

A man takes a photograph of the Capitol in Washington on Feb. 12, 2013. Photographer: Andrew Harrer/Bloomberg

Democrats and Republicans in the U.S. Congress are nowhere near a plan to avert $1.2 trillion in spending cuts about two weeks before they are set to begin.

It’s the latest in a series of fiscal deadlines created by Congress that in the past two years took the U.S. to the brink of a debt default, a government shutdown and middle-class tax increases that neither party wanted. Unless lawmakers act, the across-the-board spending reductions will begin March 1.

Leaving the cuts in place would shave U.S. economic growth this year by 0.6 percent and cost 750,000 jobs by the fourth quarter, Congressional Budget Office Director Doug Elmendorf said yesterday at a hearing.

About half the cuts would affect defense spending, and military leaders are pressuring lawmakers to avoid them. Allowing the reductions, known as sequestration, to take effect would mean less training for Army personnel and fewer purchases of Navy vessels and Air Force fighter jets, the leaders said.

“It’s pretty clear to me that the sequester’s going to go into effect,” Senate Minority Leader Mitch McConnell, a Kentucky Republican, said yesterday.

‘Eerie Similarity’

“It is an eerie similarity here, isn’t there, to previous occurrences,” McConnell said. “Take no action, go right up to the deadline, and have an 11th-hour negotiation. Read my lips: I’m not interested in an 11th-hour negotiation.”

House Speaker John Boehner was quoted by the Associated Press today as saying “it’s hard to imagine” the House and Senate agreeing on a deal to avoid the cuts. “This is going to be a little bleak around here when this actually happens and people actually have to make decisions,” he said in an interview, according to AP.

President Barack Obama, in his State of the Union address yesterday, said Republicans, Democrats, business leaders and economists agree the automatic cuts “are a really bad idea.”

“Some in this Congress have proposed preventing only the defense cuts by making even bigger cuts to things like education and job training; Medicare and Social Security benefits,” the president said. “That idea is even worse.”

Obama repeated his call for a “balanced approach to deficit reduction, with spending cuts and revenue, and with everybody doing their fair share.”

In the Republican response to the president’s speech, Florida Senator Marco Rubio said the choice in balancing the budget “doesn’t have to be either higher taxes or dramatic benefit cuts for those in need.” He said economic growth would “create new taxpayers, not new taxes.”

2011 Agreement

Lawmakers agreed to the automatic spending cuts, to be spread over nine years, as part of a 2011 fiscal deal to increase the U.S. debt limit. The spending cuts were supposed to be so onerous that Congress and the president would never let them occur and would come up with a plan to replace them.

Senate Democratic leaders plan this week to outline a $120 billion proposal, including new tax revenue, to delay the cuts for 10 months.

The Democratic proposal would set a minimum 30 percent tax rate for Americans with the highest incomes, known as the “Buffett rule” after billionaire investor Warren Buffett. It would bar companies from deducting the cost of moving jobs and investments out of the U.S., according to a Senate Democratic aide who asked not to be identified because the proposal hasn’t been made public.

The Senate plan will include revised defense reductions and cuts to agricultural subsidies, the aide said.

Top Incomes

Republicans in both chambers say they won’t accept any proposal that includes new revenue, following the Jan. 1 deal that raised tax rates on top incomes.

Democrats’ push for more tax revenue isn’t “going to fly” with Republicans in either chamber, Senator Orrin Hatch, a Utah Republican, said in an interview.

“It’s posturing,” said Hatch, the top Republican on the tax-writing Finance Committee. Senate Democrats are attempting to look “like they’re really trying to do something when, in fact, they know that’s dead on arrival,” he said.

Boehner, an Ohio Republican, has said he opposes any delay in the spending reductions unless Congress replaces them with other “cuts and reforms,” with no new revenue.

As a precaution, the House isn’t passing any revenue bills that Senate Democrats could use as a vehicle for a plan that would include higher tax revenue. The Constitution requires tax- writing bills start in the House.

‘Harmful Cuts’

“The president laid out no plan to eliminate the sequester and the harmful cuts that will come as a result of it,” Boehner told reporters today in Washington. “It’s incumbent upon the president and the Senate Democrats to show us their plan to stop the sequester from going into effect.”

Boehner said the House intends to wait for the Senate to act on a plan to avert the automatic cuts.

Another fiscal deadline will arrive on March 27, when legislation funding the federal government will expire. House leaders plan to take up a six-month funding measure that would reduce spending levels to less than $1 trillion, according to two Republican aides.

Senate Majority Leader Harry Reid said Republicans are willing to let the automatic spending cuts go into effect “without closing a single tax loophole or asking millionaires to contribute a single penny.”

Republicans “seem content to sit on the sidelines and let the sequester take effect,” said Reid, a Nevada Democrat.

The cuts would be “bad for job growth,” said Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee.

‘No Disagreement’

“There’s no disagreement” on the need to reduce the deficit, Van Hollen said.

Boehner’s spokesman, Brendan Buck, said the speaker agrees that the automatic reductions are the wrong way to cut spending. Last year, the House voted on its plan to avert the cuts, though it wasn’t considered by the Democratic-led Senate. Now, House leaders won’t hold another vote before March 1, said Representative Tom Cole, an Oklahoma Republican.

“We’ve done it twice already,” Cole said. “I can understand the frustration of my leadership here. These cuts are going to happen.”

Some Senate Republicans questioned whether Obama genuinely wants a bipartisan deal to avert the cuts.

“Why doesn’t the president call us over to the White House, we sit down and come to an agreement to prevent what the secretary of defense has said would be a disaster for our national security?” said Senator John McCain, an Arizona Republican who has sought to spare defense from the cuts.

‘Discuss It’

“If you are really interested in a result, you say to the other side, ‘Sit down and let’s discuss it,’” said McCain, the 2008 Republican presidential nominee who lost to Obama.

Another Republican who has sought to spare defense, New Hampshire Senator Kelly Ayotte, is pushing to delay the cuts through Sept. 30 by freezing congressional pay and cutting a number of federal government jobs by attrition.

“There are other proposals that could be brought forward that are all spending cuts,” Ayotte said.

The Pentagon’s military and civilian leaders appeared before the Senate Armed Services Committee yesterday to outline what they called the worst possibilities if the automatic budget cuts take effect.

The Defense Department “might not have enough funds” to pay for its health-care system, known as Tricare, according to Deputy Defense Secretary Ashton Carter.

$46 Billion

An across-the-board reduction of about $46 billion imposed on defense programs in the final seven months of the current fiscal year would risk “significant and damaging cuts in nearly every budget category,” Carter said.

“These devastating events are no longer distant problems,” Carter said. “The wolf is at the door.”

Training would have to be reduced for 78 percent of the Army’s units that aren’t in Afghanistan, South Korea or deploying this year, said General Ray Odierno, the Army chief of staff.

The cuts may hurt the war-readiness of the 82nd Airborne Division brigade at Fort Bragg, North Carolina, the Army’s premier rapid-deployment force, Odierno said.

Should the reductions last a full decade, the Navy’s fleet would be reduced by about 50 vessels to 230 ships, Navy Vice Chief Admiral Mark Ferguson said.

At the start, the service would reduce purchases of Boeing Co (BA:US). P-8 patrol aircraft, cancel an Arleigh Burke-class destroyer built by General Dynamics Corp (GD:US). and delay construction of the aircraft carrier John F. Kennedy being built by Huntington Ingalls Industries Inc (HII:US).

The Air Force would have to cut two of its planned 19 F-35 jets from Lockheed Martin Corp (LMT:US). this year, said General Mark Welsh, the service’s chief of staff.

To contact the reporters on this story: Roxana Tiron in Washington at rtiron@bloomberg.net; Kathleen Hunter in Washington at khunter9@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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