February 28, 2013 7:36 pm

Chances of sequester quick fix run out

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The prospect of a quick fix by the end of March to unwind $85bn in automatic spending cuts due to hit the US economy is diminishing as both sides weigh their next move in America’s never-ending budget wars.

The deadline for the cuts is due to pass on Friday without a resolution. The blow to government services is expected to be soft at first, but could eventually affect the lives of millions of Americans, from delays in air travel to cuts in day care services, and a reduction in the number of food inspectors and prison guards.

The conventional wisdom in Washington has held that sequestration – automatic cuts worth $1.2tn over the next decade – would take effect but that, under intense political pressure once the cuts were under way, lawmakers would agree to replace them by the end of March. That is when Republicans and Democrats in Congress will be forced to agree to a budget with Barack Obama, the president, for the remainder of this fiscal year or risk a shutdown of the government.

The theory held that Republicans and Democrats would have a big political fight over the budget proposal – known as the continuing resolution – and that a compromise agreement would simultaneously address the cuts under sequestration.

But that outlook is changing.

“That seems to be conventional wisdom since it is the next ‘must-pass’ legislative vehicle. But while it is theoretically possible, I do not think it is at all likely,” said a senior Republican aide in the House.

The more likely scenario on Friday, according to aides and other insiders, is that Republicans will opt to avoid a political fight over a government shutdown and try to simply reshuffle the $85bn in spending cuts this year. This would give the White House more flexibility to choose programmes it wishes to cut instead of the across-the-board mandate under sequestration. But Mr Obama rejected the idea this week, saying that there was “no smart way” to do it.

“From the Republican standpoint, sequester is already in the bank,” says Chris Krueger, an analyst at Guggenheim Securities. “Republicans will agree to fund the government at current levels with the sequester on top of that. The road map is pretty clear.”

John Boehner, the Republican speaker, would have to be “careful” about agreeing any kind of grand bargain with the president that would raise taxes because conservatives in the House are pleased with their current position on sequestration, added John Feehery, a former senior Republican staffer in the House.

Mr Feehery said Republicans see sequestration as a better political manoeuvre than a government shutdown because it proves their anti-spending bona fides, without the political burden of shutting down the entire government, which is politically unpopular. Indeed, many Washington insiders are now looking ahead to the bigger battle in the budget wars: the extension of the US borrowing authority, due this summer.

“I’m beginning to think we’re going to drift along again until the debt limit,” says Robert Bixby, executive director of the Concord Coalition, and a prominent US fiscal hawk. He argues that any backlash against Congress over sequestration will not likely gain strength for months, because many of the most draconian cuts and furloughs of government workers will not be felt immediately.

The US borrowing limit of $16.4tn was suspended by Congress in February but will go back into effect on May 19 at a higher level to account for any new debt accrued during the intervening months. The Treasury would then have several weeks – maybe even as long as two months or more – to crank up special cash management operations to avoid default. But after that, a US default on its debt could once again be on the cards along a similar timeline to the stand-off over the summer of 2011, which climaxed in late July and early August.

Democrats have shown no signs that they are worried about losing ground.

“We think we’re on the right side of the policy here – that deficit reduction really should be a responsible mix of responsible spending cuts and new revenue. So we’re not going to change our position on this and the president’s clearly very confident in his position,” said one Democratic aide in the Senate.

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