Austerity cuts to further slow US economy


Published — Monday 25 February 2013

Last update 24 February 2013 11:31 pm

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WASHINGTON: Looming austerity cuts will reduce aid to the poor, cause widespread flight delays and close parts of national parks, further hurting the US economy, government officials and analysts say.
Warnings were mounting over the impact of the $ 85 billion automatic "sequester" spending reductions mandated to start March 1 if warring politicians don't strike a more modest deficit reduction deal before then.
Economists said the cuts would shave 0.5 percent or more from economic growth, as government employees and contractors around the country would tighten their own spending in the face of slowed government disbursements and furloughs.
Communities around the country were also being warned of the impact of the cutbacks.
The National Park Service said it would be forced to tighten services and close facilities going into the summer, when parks are a tourism magnet that pumps millions of dollars into local economies.
And on Friday, Transportation Secretary Ray LaHood said the Federal Aviation Administration would be forced to furlough workers for two to four days a month starting in April, reducing staffing of airports and traffic control services —- meaning flight delays of up to 90 minutes at major airports.
"Once airlines see the potential impact of these furloughs, we expect that they will change their schedules and cancel flights."
The cuts won't be a catastrophe, Macroeconomic Advisors said in a report. But growth this year will fall back to just 2.0 percent from a projected 2.6 percent, and cost about 700,000 jobs through the end of 2014, in layoffs and reduced hiring.
The Bipartisan Policy Center, a Washington think tank, estimated the impact would be one million fewer jobs than would have been created.
"The higher unemployment would linger for several years," said Macroeconomic Advisors.
The sequester comes from a 2011 poison-pill law to force the government to radically slash spending over the next 10 years if Democrats and Republicans were unable to craft a more moderate deficit reduction package.
The government has to trim $ 85 billion through the rest of this fiscal year, March through September, and $ 110 billion each year after that, through 2022.
The two sides appeared still far apart days before the law is due to take effect, on March 1.
The US economy accelerated last year to a modest 2.2 percent expansion, and economists had been hoping for as much as 3.0 percent this year.
The sequester will add to the drag from $ 200 billion in tax hikes implemented in January to narrow the huge government deficit.
Douglas Elmendorf, head of the Congressional Budget Office, said that the combination will shave about 1.5 percent from potential growth this year.
While growth could then pick up in 2014, he said output would remain "below its potential level" until 2017 if the sequester law remains in place.
Washington, the seat of the federal government, could be hit harder than elsewhere by the temporary furloughs and contracting pullbacks.
The largest impact will be on the defense sector. The Pentagon employs some 800,000 civilians who could be hit by furloughs and accounts for tens of billions of dollars in contracting to civilian companies.
"If furloughs are enacted, civilians will experience a 20 percent decrease in their pay between late April and September," Jessica Wright, acting under secretary of defense, told a congressional panel.
One Washington contractor, who preferred to remain unnamed, said the industry was already suffering because Democrats and Republicans haven't been able to agree on a full-year budget, constraining Pentagon planning abilities.
"We expect that to get worse if sequestration occurs," he told AFP. That would force small contractors to lay off experts.
But the impact will be felt nationwide.
"This really and truly affects all 50 states," said defense expert Mackenzie Eaglen of the American Enterprise Institute, who warned of a weakened US military.
"So many of these defense department civilian jobs are not in Washington. They are at shipyards, and they are at military vehicle depots" around the country, she added.
Some analysts played down the sequester, saying government offices have been cutting back spending and stockpiling funding since last year in preparation.
Former CBO director Douglas Holtz-Eakin, now president of the conservative American Action Forum, called the $85 billion "a small cut in a huge pie" from a $ 3.6 trillion annual budget.
Japanese investment bank Nomura told clients in a research note that it does not expect any compromise before March 1. But it predicted that politicians getting together for a less austere compromise within weeks.
On the other hand, it added, "We may face a government shutdown after 27 March. While we do not think that this is the most likely scenario, it could happen."

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