U.S. budget cuts more blip than bomb

February 28, 2013

By Daniel Indiviglio
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

For all the rhetoric from both political parties, the impending U.S. budget cuts are more a blip than a bomb. An initial $100 billion-worth of federal spending reductions won’t do much real damage to the growing economy.

President Barack Obama has lately portrayed the so-called sequester as devastating and putting thousands of jobs in jeopardy. He has warned that cuts to air traffic control and airport security will cause travel delays – and even that defunded research could set back science for a generation.

There’s no doubt that the cuts are heavy-handed. The whole thing was supposed to be replaced by a more thoughtful package which Obama and Congress have been unable to negotiate. Even so, the federal budget, excluding interest payments, will still grow by $13 billion in 2013 and $1.8 trillion over the next decade, according to the Congressional Budget Office. The cuts, which will hit each year for a decade if they aren’t replaced, mostly eat away at projected increased spending, not the prior year’s level of outlays.

All the same, some programs will see authentic cuts. The sequester slashes discretionary items like environmental protection and education by $72 billion, or 5.6 percent. But by 2019 this category of spending will once again be higher than it was in 2012. And half the cuts come from a military already winding down its presence in, say, Afghanistan and ripe for greater procurement discipline. Other government departments may need short periods of reduced work hours or hiring freezes, but attrition should minimize the need to fire too many people.

The CBO estimates the sequester could reduce GDP growth by about half a percentage point. But even accounting for this drag, Federal Reserve projections show 2013 economic expansion of between 1.7 percent and 2.4 percent. That’s modest but it’s no worse and potentially better than the past two years. It’s a short-lived effect that should be quickly absorbed by the private sector.

Both political sides are using scare tactics. The White House, for instance, may hope to push Republicans into raising taxes again. In a more pragmatic world, Washington’s energy would be focused instead on structuring cuts that do the least real damage. With Jack Lew, an authentic budget guru, winning confirmation on Wednesday as the next Treasury secretary, Obama’s administration is equipped to lead the way doing just that.

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