By Nick Mann | 6 February 2013
US President Barack Obama has called on Congress to delay the ‘economically damaging’ spending cuts due to come into effect on March 1 by agreeing a mix of tax increases and smaller cuts.
The automatic spending reductions, known as sequestration, would amount to an estimated $85bn in the first year and $1.2 trillion between now and 2022. They had originally been scheduled to come into effect on January 1, but a last-minute deal postponed this for two months.
Speaking yesterday, Obama said that while Congress was ‘working towards’ the balanced mix of spending cuts and tax reform needed to reduce the US deficit, a full budget ‘might not be finished’ before the start of next month.
‘Unfortunately, that’s the date when a series of harmful automatic cuts to job-creating investments and defence spending – also known as the sequester – are scheduled to take effect,’ he explained.
If Congress ‘can't get a bigger package done by the time the sequester is scheduled to go into effect, then I believe that they should at least pass a smaller package of spending cuts and tax reforms that would delay the economically damaging effects of the sequester for a few more months until Congress finds a way to replace these cuts with a smarter solution,’ Obama said.
He added: ‘Congress is already working towards a budget that would permanently replace the sequester. At the very least, we should give them the chance to come up with this budget instead of making indiscriminate cuts now that will cost us jobs and significantly slow down our recovery.’
However, the leader of the Senate Republican minority, Mitch McConnell, called on Democrats to put forward ideas for ‘smarter’ cuts.
‘Now that Congress has acted on the tax issue, the president needs to lay out significant spending reforms – the other side of the “balance” as he defines it,’ he said.
‘But the American people will not support more tax hikes in place of the meaningful spending reductions both parties already agreed to and the president signed into law.’
Yesterday, economic analysts reported that, if the current laws governing federal taxes and spending do not change, the budget deficit will reduce this year to $845bn, or 5.3% of gross domestic product, its smallest size since 2008.
The Congressional Budget Office projected that the deficit would then continue to reduce, falling to 2.4% of GDP by 2015. However, the deficit would then increase again due to the pressures of an ageing population, rising health care costs and growing interest payments on the federal debt.
‘As a result, federal debt held by the public is projected to remain historically high relative to the size of the economy for the next decade. By 2023, if current laws remain in place, debt will equal 77% percent of GDP and be on an upward path,’ it added.
The CBO noted, however, that looming decisions over sequestration and the debt ceiling could affect its projections significantly. Avoiding the automatic spending cuts and extending tax breaks would make the deficit each year ‘substantially larger’ over the next decade and debt rise to 87% of GDP by 2023, it said.
