Bloomberg News

Obama’s Warning on Automatic Cuts Obscures Threats Ahead

February 26, 2013

Obama's Budget Warnings Obscure Bigger Fiscal Threats Looming

The U.S. Capitol building is seen reflected in Washington, D.C.. Photographer: Andrew Harrer/Bloomberg

While President Barack Obama warns of the dire economic impact from across-the-board budget cuts, the nation may face more serious fiscal debates in the months ahead on a potential government shutdown and renegotiation of the debt ceiling.

With just three days before the $85 billion in reductions for this year are scheduled to start, Obama and Republicans led by House Speaker John Boehner yesterday traded blame again for the impasse. The president and his Cabinet officers drew a landscape of lost jobs, long lines at airports, delays at ports and cutbacks at popular national parks.

Yet most of the impact of the cuts, known as sequestration, wouldn’t be felt until weeks after the deadline, giving both sides more time to strike a deal. Markets haven’t been moved by the political leaders’ concern, as stocks have risen this year and Treasury rates are little changed.

“There is a danger that this is over-hyped,” said Steve Bell, senior director of economic policy at the Bipartisan Policy Center and a former Senate Republican budget aide. “Unlike a government shutdown, lights aren’t going to go out the next day. On March 2, virtually everything will be going on as before.”

There’s been no public sign of negotiations between Obama and congressional Republicans. As the administration continued laying out details of how programs used by many Americans would be curtailed, Republican governors joined their congressional delegations in accusing Obama of overplaying his hand.

Governors React

The budget can be cut “without jeopardizing the economy,” Louisiana Governor Bobby Jindal said after joining the rest of the National Governors Association yesterday for a meeting with Obama at the White House. “The president needs to stop campaigning, stop trying to scare the American people.”

South Carolina Governor Nikki Haley, a Republican, said the amount involved is less than 3 percent of a $4 trillion federal budget and cutting that should be a simple task.

While administration officials stressed the biggest consequences won’t take effect right away, Obama said they were no less a threat to the world’s largest economy, which stalled in the fourth quarter.

“The uncertainty is already having an effect,” Obama said yesterday. “Companies are preparing layoff notices. Families are preparing to cut back on expenses. The longer these cuts are in place, the bigger the impact will become.”

Market Impact

Investors are signaling they view the $15.8 trillion U.S. economy as strong enough to weather the reductions in federal spending. The Standard & Poor’s 500 Index (SPX), which sank 1.8 percent yesterday on news of uncertainty in the Italian election, still is up about 4.3 percent this year as of yesterday’s close. Treasuries are becalmed, with yields on 10- year notes trading at about 2 percent, little changed over the last month.

That may be because analysts see little chance the impasse will drag on. The median forecast of economists surveyed by Bloomberg last week predicted a compromise would be reached in 30 days, resulting in little erosion to growth.

Looming even larger than the March 1 start of the automatic spending cuts is a potential government shutdown if Democrats and Republicans can’t agree on a stopgap funding measure by March 27, the date that current government funding expires. Without a deal in Congress that Obama would sign, government spending would halt.

Debt Ceiling

The White House also faces a fight when the May 19 expiration of federal borrowing authority approaches. It was the last major battle over the debt ceiling that brought about the sequestration. The $1.2 trillion in across-the-board spending cuts spread over nine years were put in place as part of a 2011 deal to increase the U.S. debt limit.

Obama is keeping his focus on the March 1 deadline for now. He told the governors yesterday that the cuts can be turned off “with just a little bit of compromise.”

Obama and congressional Democrats say there must be a “balanced” approach, including higher tax revenue with the spending cuts. Republicans say they won’t agree to more taxes, after Congress voted Jan. 1 to raise rates on top incomes.

“Well, Mr. President, you got your tax increase,” Boehner, of Ohio, said at a news conference yesterday. “It’s time to cut spending here in Washington.”

Shipbuilder Visit

Obama is keeping up the drumbeat of warnings. Today he’s visiting the facility of Huntington Ingalls Industries Inc. (HII:US) in Newport News, Virginia, which builds ships for the Navy. The automatic cuts are to be split almost evenly between defense and non-defense spending, and the White House said the company has suppliers in all 50 states.

The president plans to argue that the “only reason” the cuts will take effect is that Republicans in Congress “choose to protect loopholes only enjoyed by the wealthiest and big corporations at the expense of jobs in Virginia,” the administration said in a statement this morning.

Salary reductions at the Pentagon, which plans to furlough 800,000 civilian employees, won’t take effect until late April, according to Pentagon Comptroller Robert Hale. Visiting hours would be cut at all 398 national parks, Interior Secretary Ken Salazar said yesterday. And Homeland Security Secretary Janet Napolitano warned that airport security lines could mean four- hour waits and imports could be delayed at border crossings.

The effects will build gradually, Napolitano said yesterday. “You won’t see them immediately like a shutdown, but it’ll accrue over the next weeks.”

Public Notice

Bell said the first way most citizens are likely to notice a sequestration is cancellation of contracts for local projects such as renovations for federal buildings, he said. Those may start to happen in a week to 10 days.

Furloughs and interruptions of government services are likely to take at least a month, Bell said.

“They have to deal with the unions,” Bell said. “In my opinion, they will not happen until April or May.”

The government has gone through a sequestration as recently as 1986, he said. “It was carried out. I would venture to say virtually no one noticed,” Bell said.

The House and the Senate this week plan to vote on sequestration-replacement proposals being offered by both parties, neither of which is expected to advance.

In the House, Republican leaders indicated that they would continue to oppose any renewed efforts to raise tax revenue as a means of averting the sequestration.

To contact the reporter on this story: Lisa Lerer in Washington at llerer@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net


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