Friday, February 15, 2013

Doom scenarios for U.S. budget cuts may be overplayed

By David Lawder

WASHINGTON (Reuters) - Hundreds of thousands of people made homeless, long waits at airports and criminals going unpunished.

The U.S. Capitol building is pictured before U.S. President Barack Obama delivers his State of the Union address in front of the U.S. Congress, on Capitol Hill in Washington, February 12, 2013. REUTERS/Jim Bourg

Those were among the dire warnings from the Obama administration on Thursday of the consequences of automatic public spending cuts that are due to kick in next month.

While the measures do indeed threaten jobs and the economic recovery, experts say government agencies are overplaying the effect of the $85 billion (54.8 billion pounds) "sequestration" cuts to jolt lawmakers into halting them.

Deputy Defence Secretary Ashton Carter told a Senate Appropriations Committee hearing that U.S. military readiness would be eroded by the across-the-board cuts, to be split evenly between military and domestic discretionary programs.

Carter said some 46,000 contract employees would be laid off, and 800,000 civilian employees would be furloughed for 22 days and ship and aircraft maintenance would be slashed.

But the cuts are only a small portion of the overall $3.6 trillion U.S. annual budget, and a miniscule component of the vast U.S. economy.

"Somehow, the idea that if we go back to 2007 military funding levels we're going to be a second-rate power, well that's overdoing it," said Lawrence Korb, a senior fellow with the Centre for American Progress and a former U.S. assistant Defence secretary.

"If you kept this cut, you're back to $500 billion a year. I find it hard to get that worried about it," Korb said, noting that this was still vastly more than any other country spends on its military.

A senior White House budget official cautioned, though, that sequestration will have grave real effects.

"We simply cannot cut $85 billion out of our budget over the next seven months without critical consequences for Defence and non-Defence," said Danny Werfel, controller for the Office of Management and Budget.

He was one of several administration officials, including cabinet secretaries, to list the serious ramifications if Congress and President Barack Obama did not reach an agreement to stop sequestration.

The Justice Department predicted that it would handle 1,000 fewer criminal cases this year due to the cuts. The FBI would have to furlough all of its employees for up to 14 days, which the agency said was the equivalent of taking 775 agents off the streets.

"Criminals that should be held accountable for their actions will not be held accountable and violators of our civil laws may go unpunished," Attorney General Eric Holder wrote in a letter to Senator Barbara Mikulski of Maryland, the chairwoman of the Senate Appropriations Committee.

Homeland Security Secretary Janet Napolitano said that screening lines at busy U.S. airports could grow by up to an hour as Transportation Security Administration staff are furloughed.

Waits at border crossings could reach 4 to 5 hours, ports could face gridlock and reduced Coast Guard patrols would mean less interdiction of drug and illegal immigrants and more pressure on fisheries, she said.

Secretary of State John Kerry said that "vital missions of national security, diplomacy and development" were at risk from the budget crunch.

Housing and Urban Development Secretary Shaun Donovan predicted some 225,000 people, including veterans, could be at risk of becoming homeless as they lose access to housing vouchers or emergency shelter programs.

FURLOUGH NOTICES

The Pentagon has more flexibility to deal with the cuts than domestic agencies, said Gordon Adams, an American University foreign policy professor.

Domestic agencies are more payroll-based, so they have little choice but to lose people, whereas the Pentagon has all of its war operations and military pay exempted, and its procurement activities can largely run on previously allocated dollars. "We are not suddenly going to be subject to overseas coercion."

But even on the domestic side, the predictions of gloom are subject to hyperbole and political calculation, he said.

"If I'm the administration, I'm going to ramp up the biggest and most horrible effects I can to put pressure on the Republicans" to reach a deal to prevent the cuts.

Werfel acknowledged that, unlike a government shutdown, not all of the effects are going to happen immediately when the cuts begin on March 1.

In some cases, furlough notices will go out at that time, but employees may not be sent home for 30 days due to statutory notice periods. In other cases, negotiations with unions over implementation of furloughs may take longer.

But the effects of the cuts, will build up "relatively quickly" within weeks and months, Werfel said. The layoffs, furloughs and curtailed services described by administration officials would more likely be spread over the seven months to the end of the fiscal year on September 30.

Part of the problem the administration faces is a lack of flexibility in prioritizing the cuts, which were aimed at nearly every discretionary budget account and designed to pressure lawmakers to reach a broader agreement to reduce deficits.

Lack of alternative preparations means that agencies have little choice but to furlough employers and curtail operations to meet their savings targets for the fiscal year.

But after that, Defence savings can be found that will not compromise U.S. security, said Mattea Kramer, research director at the National Priorities Project, a Massachusetts research group focused on the U.S. budget.

"There is waste, there are obsolete programs to be sunsetted, there is Cold War technology that we need not be investing in any longer," Kramer said.

The dire warnings of chaos on the domestic side may be more motivated by worries that the automatic cuts will hit economic growth, which is the top Democratic priority, said Ethan Siegal, who advises institutional investors on Washington politics.

The Congressional Budget Office forecast last week that if the sequester occurred, it would reduce U.S. economic output by 0.6 percentage points and slash 750,000 jobs.

Siegal said the administration may find ways to mitigate the effects of the cuts, but it is not politically advantageous to do so at this time, when it wants to put maximum pressure on Congress to reach a budget deal.

He predicted that the sequester would be delayed again just before a March 27 deadline for new government funding legislation.

"Government agencies are marvellous at massaging these things and moving money around."

In a sign that lawmakers are looking for ways to prevent the cuts, Senate Democrats offered a plan on Thursday to replace the sequester with tax hikes and reduced farm subsidies, but the proposal is expected to be quickly shot down by Republicans.

OMB's Werfel said that the administration will do what it can to blunt the cuts.

"Whatever the tools we have, we're going to use. I'm not going to comment on specific aspects, I just know that it is going to be enormously challenging and there is no way we're going to mitigate these impacts effectively enough," he told reporters after the hearing.

(Additional reporting by Susan Cornwell and David Alexander, Editing by Alistair Bell and Paul Simao)

News

Friday, February 15, 2013

Doom scenarios for U.S. budget cuts may be overplayed

By David Lawder