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American crisis II: Sequestration

If the White House and Republians cannot agree on how to fund $1.2tn in deficit reduction, the fallout will be dire

Gulf News

Washington’s fiscal fights over the past two years have come with names that blend budget arcana with the drama of a Hollywood blockbuster. The failed “grand bargain” in 2011 was followed by the “debt ceiling” showdown, the “supercommittee” and the battle over the “fiscal cliff”, which reached its climax as the clock struck midnight to usher in the new year.

But sequestration, as the bloodless word suggests, is an altogether different animal. Unlike other budget confrontations between the White House and congressional Republicans, the $1.2 trillion in spending cuts, which start on Friday, take effect slowly, over 10 years.

President Barack Obama used sequestration to get himself out of a hole in tense budget negotiations with Republicans in August 2011. Now he is struggling to unwind it, precisely because the measure does not land with the drama and impact that accompanied previous budget battles.

“We don’t want it. We think that it’s bad policy. It was designed to be bad policy. That was the whole point,” said Jay Carney, the White House spokesman. “The sequester was written in a way that would ensure that Congress would never let it happen.”

Deadlocked over lifting America’s borrowing limit in 2011, the White House agreed to an initial $1 trillion in spending cuts over a decade, under pressure from Republicans. But the two sides were unable to agree on how to fund a second tranche of $1.2 trillion (Dh4.41 trillion) in deficit reduction and sent the measure to a bipartisan congressional “supercommittee” to be sorted out.

To make sure the 12-member panel found a formula to reduce the deficit, the White House added the threat of automatic cuts - half from discretionary programmes and half from defence - if they failed to reach a deal.

But since then, the political landscape has shifted in ways that the White House did not anticipate.

The Obama administration was convinced that the threat of large defence cuts, on top of reductions in the Pentagon budget settled in 2012, would bring the generally hawkish Republicans back to the negotiating table and force them to accept the higher tax revenues Democrats were seeking.

But so far the desire of the Republicans to cut the budget and keep taxes low has overwhelmed the defence hawks in the party. And they have been joined by some dovish Democrats, who have long wanted to cut Pentagon spending.

“Some of our people see this as their best chance in decades to force a reduction in military spending,” said a senior Democrat on Capitol Hill.

The White House and Republicans are divided along the same lines that have split them for the past two years. Obama insists that the $1.2 trillion includes additional taxes; the Republicans say Obama already secured a tax rise on the wealthy this year and that all the savings must come from lower spending.

Unlike the past episodes of fiscal brinkmanship, however, no one is holding their breath for another one-minute-to-midnight agreement on the eve of Friday’s deadline. This is because for all the US political leaders involved - Republicans, Democrats and the White House alike - sequestration is arguably the most economically tolerable place to pick a fight and stand firm on principles.

A default on US debt, which hung over the 2011 negotiations, or the huge tax rises of the “fiscal cliff”, or even a government shutdown, are seen as far more irresponsible and politically less palatable outcomes.

But that is not to say that there will be little or no damage from the sequestration. According to economists, it could affect US growth by 0.3-0.6 percentage points in 2013 and maintain the unemployment rate close to 8 per cent for the rest of the year.

Federal employees, including 800,000 civilian Pentagon workers, will be sent home without pay and a broad swath of government programmes will be slashed. This would be a considerable blow at a time of rising oil prices and the potential for renewed instability in the Eurozone in the wake of the inconclusive Italian election .

The expectation in Washington is that after a few weeks of sequestration, as the consequences begin to be felt, Republicans and Democrats could be cajoled into a deal to fix the problem, just in time for the next fiscal deadline of March 27, to extend funding for federal government agencies.

However, given the bleak record of rolling budgetary battles ending in unsatisfactory agreements, there is little hope that America’s fiscal path will be cleared any time soon. The US governs by crisis these days, and neither side seems capable of doing anything about it.

— Financial Times