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Obama risks fallout from budget cut effects

Update: March, 08/2013 - 09:41

by Thu Hang

Only three months after winning re-election, US President Barack Obama found himself faced with a raft of unresolved problems from his first term: persistently high unemployment, crushing government debt and a deep partisan divide. Budget limitations are now challenging Obama's ability to implement his economic vision.

While Republicans are against further tax increases, many of Obama's fellow Democrats have refused to consider cuts to popular health and retirement programmes. As a result, a share of deficit reduction has focused on cuts to military and domestic programmes.

From the start of March, automatic cuts to defence and other areas of government have taken effect due to a failure by Republicans and Democrats to agree on a plan to reduce the nation's vast debt.

Unless a compromise is reached, the cuts could be extended for years.

The so-called "sequestration" marked a new failure in relations between the president and the republicans in Congress.

But as president, Obama is charged with minimising the damage from the spending reductions and must find the way to dodge the economic downturn.

Obama, his hair visibly grayed over the past four years, has called opposition lawmakers to find a way to stop US$85 billion in damaging budget cuts and congressional Republicans announced a plan to prevent a government shutdown.

Disputes between the two sides seemed to have made some progress towards resolution when US House of Representatives on Wednesday voted to pass a funding bill to keep the federal government in operation till September.

The Senate is expected to make changes to the bill and send it back before March 27. Without such legislation, the federal government will run out of money on March 27.

The bill granted the Pentagon and the Department of Veterans Affairs greater flexibility in implementing their share of spending cuts.

The spending cuts were set to hit various governmental departments this fiscal year starting last Friday, as agreed by Democrats and Republicans in January to resolve the so-called "fiscal cliff".

Senate Majority Leader Harry Reid said the Democratic-controlled Senate is expected to pass a similar bill next week. The lawmakers would then together resolve the bills into one measure that passes both chambers and heads to Obama.

Much remains to be done before enough lawmakers sign off on a bill that can pass Congress.

Many Democrats in the Republican-controlled House voted against the funding bill because it would not give the Obama administration flexibility in carrying out the new, automatic spending cuts for domestic programmes such as education. Last month, Democrats had sought to replace about half of the automatic spending cuts with tax hikes on the rich.

"Today the House has taken the first step towards assuring the American people that the federal government will stay open, which President Obama agrees should be our shared goal," House Speaker John Boehner was quoted as saying by AFP.

"The Senate should pass the House measure without delay so we can continue focusing on helping Americans get back to work and putting the country on a path to a balanced budget."

Failure to pass funding legislation could cause a partial shutdown of the government. It means the US economy would be destablised and eventually cause widespread pain.

The first victims to suffer the consequences of the political dispute are the millions of people faced with the risk of losing their jobs.

The government will have to cut $85 billion this year, but what does that really mean? Who will be affected?

If the cuts were to stay in place through September, the administration predicts significant air delays due to layoffs of airport security workers and air traffic controllers.

Some Pentagon weapons production could grind to a halt and the budget cuts would move through the defence contracting industry.

Meat inspections could get hung up, medical research projects cancelled or shortened, and thousands of teachers laid off.

The effects will be felt not only by Americans but also developing countries. They include the negative fallout on global growth and expected cuts in aid going to poor countries.

This comes at a bad time as the rich economies are already on a downward path. The spending cuts in the US would add to the contractionary trend in the rich countries such as the eurozone economies.

The continuous weakening of the Western economies will have opposing effects on exports, tourism, workers' remittances and incomes in developing countries. The cuts will also affect the budget for aid given to poor countries and to development programmes such as provision of medicines and food, according to a report by the Inter Press Service.

The two chambers will have to reconcile the differences before March 27 to avoid a government shutdown. The president and congressional lawmakers continue to discuss alternative paths to the sequester, but a bipartisan compromise for long-term deficit reduction remains vague. — VNS


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