US financial crisis reaches tipping point ... again

US financial crisis reaches tipping point ... again

A mandate to cut federal US spending will strip vital services, LESLEY RUSSELL writes

The United States is just hours from the onset of sequestration, a series of automatic, across-the-board cuts that are mandated to strip $US85 billion ($83.2 billion) from federal spending between March 1 and the end of the fiscal year, September 30.

The Obama administration is making a significant effort to detail the harmful consequences of this and what the cuts will mean for Americans, state-by-state and agency-by-agency. President Barack Obama has argued the sequester will weaken America's economic recovery, military readiness, and the services people depend on.

Snarls in air travel, a $1 billion cut to disaster relief funding, 10,000 teaching jobs in jeopardy, disability payments delayed, 5000 border security guards furloughed, $1.6 billion cut from biomedical research, and cuts in safety net programs for the jobless, women and children are just some of the effects predicted. Defence spending that is not exempt will be cut by 9.4 per cent and nearly 800,000 civilian defence workers will be forced to take one day of leave per week without pay.

It is estimated the sequester will lead to the loss of 750,000 jobs by the end of the year.

According to the Office of Management and Budget, there is ''no question that the sequestration would be deeply destructive to national security, domestic investments and core government functions''. These drastic and indiscriminate cuts were never supposed to happen.

When House Republicans refused to raise the debt ceiling in 2011 without significant debt reduction, and there was a standoff over tax increases, the sequester was included in the Budget Control Act as a fallback mechanism supposedly so onerous that Congress would be forced to act to replace them with a more thoughtful compromise.


But that has not happened. Now the debate is not over how to avert the dreaded cuts, but who is to blame, and there is little chance of a last-minute deal. The sticking point is the GOP refusal to consider tax increases.

Despite the fact that Obama was re-elected on a platform of balanced deficit reduction - that is, a mix of new taxes, closed taxed loopholes and further spending cuts - Republicans have adopted the Tea Party's fiscal dogma that the budget deficit must be reduced solely through cuts to federal spending.

To achieve that, experts say such cuts would need to generate $4 trillion to $5 trillion in savings over a decade - more than three times the $1.2 trillion sequestration would achieve. Given the consequences such cuts would have on essential federal programs, and the subsequent impact on the economy and employment, it is small wonder Congressional Republicans are unwilling or unable to say where such savings might be achieved. While spending cuts poll well in the abstract, their implementation affects programs that even Tea Party members support and which deliver benefits in the districts of Republicans and Democrats alike.

Obama, who enjoys far higher approval ratings than his opponents, has called the Republicans' bluff on this. He is in a much stronger political position, given the Republicans are unable to offer a coherent response to the looming sequester. Polls indicate that failure to reach a deal would lead roughly half of Americans to blame Republicans and only 31 per cent to blame Obama. And just 19 per cent agree with the Republican agenda of passing a deal with no tax increases.

In response, Republicans are accusing Obama of non-stop campaigning and trying to scare Americans, and some have denied there will be any noticeable impacts.

The lack of urgent action from the Congress may reflect the view that the full impact of this policy won't be felt immediately, but even now the uncertainty about its impact is having an effect. The Senate was expected to vote this week on two competing plans to replace the sequester, but neither was expected to win enough support to pass the Congress.

Meanwhile, economist Paul Krugman has suggested the best thing would be to simply forget about the sequester, pointing out that one reason the US economy is so sluggish is because government spending is so weak. Others have pointed out that with low interest rates and high unemployment, especially in the construction industry, this is a good time for the government to be investing in needed infrastructure upgrades rather than cutting spending.

If the sequester isn't enough manufactured crisis, there are others looming. Government funding expires at the end of March and the debt limit will be reached again around mid-May. The President may be able to sheet the blame for these to a do-nothing Congress, but they will inflict real uncertainty into the US and the global economies. They will also eat up the window of opportunity the President has to tackle the issues he wants to leave as his legacy - immigration reform, gun control, education and health care.

Dr Lesley Russell is a Senior Research Fellow at the Australian Primary Health Care Research Institute at the Australian National University.

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