January's automatic spending cuts spook Congress

WASHINGTON Thu Jul 19, 2012 9:51am EDT

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WASHINGTON (Reuters) - A meat axe approach to Washington's budget deficit problem that hacks away at nearly every corner of American society - from farmers to weapons manufacturers - is spooking the very U.S. Congress that embraced the idea nearly a year ago.

Barring any decisions to suspend or alter the plan known as "sequestration" in Washington budget parlance, $109 billion in across-the-board spending cuts will kick in on January 2, 2013.

They are an outgrowth of the 2010 elections, in which conservative Republicans swept into power promising to shrink the size and cost of government. Just months after those elections, Congress and President Barack Obama, a Democrat, signed off on nearly $1 trillion in spending cuts over 10 years, with an iron-clad commitment to follow up with another $1.2 trillion.

Now, as the initial installment of that second round of spending cuts draws near, members of Congress facing re-election this November 6 are beginning to worry that voters will not be pleased when they find out exactly how painful it can be to down-size government, especially if the belt-tightening stalls an already shaky economic recovery.

"We are known for a lot of dumb things up here. But this sequestration concept was really the dumbest," Republican Senator Lindsey Graham declared on Tuesday.

On January 2, approximately $54.5 billion in new spending cuts will hit the Pentagon while domestic programs will suffer an equal $54.5 billion in reductions. All of the cuts would be jammed into the nine remaining months of the fiscal year that ends September 30, 2013, deepening the pain.

The details of how the scalpel is to be applied would be determined by Obama's budget office. The Republican-led House of Representatives on Wednesday passed legislation demanding those details from the White House and the Democratic-led Senate has approved a similar measure.

SHIPS, CHILDREN, RESEARCHERS

But analysts have a good idea of where the cuts - aimed at reducing annual budget deficits of more than $1 trillion - would fall and it is not a pretty picture.

According to the Bipartisan Policy Center, nearly every domestic program would face the equivalent of a 12 percent spending cut next year. So, for example, grants to help states provide safe drinking water and low-income housing would suffer.

About 700,000 young children and pregnant or nursing mothers would lose nutrition assistance, 25,000 teachers and school aides would be laid off and 100,000 kids would not enter Head Start pre-school programs. The National Institutes of Health would issue about 700 fewer grants to medical researchers, the Bipartisan Policy Center estimated.

Shielded from the "sequestration" are veterans benefits, Social Security retirement checks, Medicare health benefits to the elderly and transportation programs, which are funded through a highway trust fund. Payments to doctors and others treating Medicare patients would see a 2 percent cut, though.

Richard Kogan, a senior fellow at the liberal Center on Budget and Policy Priorities, said that government supports for farmers would suffer, as would federal aid for student loans - just months after Congress, at Obama's urging, acted to keep loan rates low for another year.

"In terms of the economy - $100 billion (worth of cuts) in a $16 trillion economy is big enough to notice. It could make a difference by itself of a tenth or two tenths (of a percent) in real GDP growth over the course of a year if it stayed in place," Kogan said. Even if it ultimately is overturned by Congress, there could be a lingering psychological effect, he added.

The non-partisan Congressional Budget Office in May estimated that if the automatic spending cuts are allowed to remain in place and if former President George W. Bush's 2001 and 2003 tax cuts are allowed to expire on December 31, as scheduled, the U.S. economy could be pushed into recession early next year.

In the midst of Congress' heated debate last year over deficit reduction, Senate Majority Leader Harry Reid repeatedly warned that doing too much too fast could hamper the economic turnaround.

A new study, which was funded by the U.S. aerospace industry, by George Mason University professor Stephen Fuller argued that the January spending cuts, if triggered in January, would increase U.S. joblessness by as much as 1.5 percentage points with more than 2 million jobs lost in 2013.

Many of those job losses, he said, would be centered in states like Virginia, Florida and Pennsylvania, which could be crucial to Obama's re-election prospects.

Republicans in Congress are irate at the defense reductions, which they say would threaten national security. They have been looking at ways to get the Pentagon completely off the hook, approving House legislation that would shift the full burden to other domestic programs that Democrats vow to defend.

But Obama's defense secretary, Leon Panetta, also warned Congress last November against letting the $54.5 billion in cuts actually occur, saying they "would render most of our ship and construction projects unexecutable - you cannot buy three-quarters of a ship or a building - and seriously damage other modernization efforts."

According to a paper issued by the Bipartisan Policy Center, purchases of new aerial refueling tankers and aircraft carrier refurbishments would also be put on hold.

"The sequester would create a defense budget build-down that's more like a cliff than a staircase and that would be different from any previous era" of Pentagon budget-cutting, said Mackenzie Eaglen, a research fellow at the conservative American Enterprise Institute.

PLANS GONE AWRY

These automatic spending cuts were never supposed to happen.

They were folded into a hard-fought fiscal deal enacted last August as a cudgel. By purposely containing such Draconian actions, congressional leaders reasoned they would force the bitterly-divided Congress into taking a more intelligent approach to deficit reduction.

But by mid-November, the effort to come up with a balanced, targeted array of spending cuts and revenue increases ended in total failure.

Various members of Congress continue to study ways to write a new, more reasonable approach to deficit reduction. Democratic Senator Carl Levin told reporters on Wednesday that "Ninety percent of us want to avoid sequestration" and said a deal was still possible before the November elections.

But privately, many congressional aides say behind-the-scenes talks will not come to fruition until after November 6, if then.

In the meantime, everyone from defense contractors to recipients of social services are beginning to prepare for the worst because of uncertainties over Washington's ability to work out a compromise.

Robert Stevens, head of aerospace giant Lockheed Martin, said the looming defense savings could prompt his company to issue layoff notices for 10,000 workers. Referring to the blunt nature of the spending reductions, Stevens told the House Armed Services Committee on Wednesday: "It's not aligned with the national security strategy. It's not aligned with technology evolution. It's not aligned with mission areas."

Similar worries come from a much different corner: Low-income households in January could see significant reductions in the help they receive from the government for paying winter home-heating bills - on top of other social safety net cuts.

Mark Wolfe, executive director of the National Energy Assistance Directors' Association, said that 800,000 households could lose benefits just as winter cold snaps take hold. States are having to plan for next winter not knowing whether Congress will find a way to avoid or fine-tune the automatic cuts.

"It hurts your head to think what January would look like," Wolfe said.

(Additional reporting by Lauren French, Thomas Ferraro and Donna Smith; Editing by Fred Barbash and Vicki Allen)

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