NEW YORK, March 1 (Reuters) - The U.S. government hurtled today toward making deep spending cuts that threaten to hinder the nation's economic recovery, after Republicans and Democrats failed to agree on an alternative deficit-reduction plan.
The $85 billion in across-the-board “sequestration” cuts were expected to cause airport delays, disrupt public services and result in lower pay or layoffs for millions of government workers.
Locked in during a bout of deficit-reduction fever in 2011, the time-released cuts can only be halted by agreement between Republican lawmakers and the White House.
That has proved elusive so far.
Both sides still hope the other will either be blamed by voters for the cuts or cave in before the worst effects - like air traffic chaos or furloughs for tens of thousands of federal employees - start to bite in the coming weeks.
Barring any breakthroughs in the next few hours, the cuts will begin to come into force at some time before midnight on Friday night. The full brunt of the belt tightening, known in Washington as “sequestration,” will take effect over seven months so it is not clear if there will be an immediate disruption to public services.
President Barack Obama meets top leaders of Congress at the White House at 10 a.m. EST (1500 GMT) to explore ways to avoid the unprecedented, across-the-board cuts totaling $85 billion.
But expectations were low for a deal when the Democratic president huddles with Senate Majority Leader Harry Reid, Senate Republican leader Mitch McConnell, House of Representatives Speaker John Boehner, the top U.S. Republican, and House Democratic leader Nancy Pelosi.
Democrats insist tax increases be part of a solution to ending the automatic cuts, an idea Republicans reject.
“We should work together to reduce our deficit in a balanced way - by making smart spending cuts and closing special interest tax loopholes,” Obama said on Thursday.
Congress can stop the cuts at any time after they start on Friday if the parties agree to that. In the absence of any deal at all, the Pentagon will be forced to slice 13 percent of its budget between now and Sept. 30. Most non-defense programs, from NASA space exploration to federally backed education and law enforcement, face a 9 percent reduction.
The International Monetary Fund warns that the cutbacks could knock at least 0.5 percentage point off U.S. economic growth this year and slow the global economy.
The prospect of weaker growth and a jump in unemployment caused by the cuts was being seen by some in the markets as making it more likely the U.S. Federal Reserve will need to maintain its ultra lose monetary policy for longer.
“The market is of the view that if there's a fiscal tightening which causes a significant negative impact on economic prospects and the labor market, then the Fed will have to respond,” said Ian Stannard, head of European FX strategy at Morgan Stanley.
Financial markets have also had a long time to assess the potential impact of the cuts on growth and believe it is not tantamount to a recession trigger.
“There is no immediate and visible impact to the economy so markets are not seeing it as a tail risk,” said Ayako Sera, a market economist at Sumitomo Mitsui Trust Bank in Tokyo.
DISEASE RESEARCH, WEAPONS HIT
If the cuts were to stay in place through September, the administration predicts significant air travel 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 ripple through the sprawling defense contracting industry.
Meat inspections could get hung up, medical research projects on cancer and Alzheimer's disease canceled or curtailed and thousands of teachers laid off.
Instead of these indiscriminate cuts, Obama and Democrats in Congress urge a mix of targeted spending cuts and tax increases on the rich to help tame the growth of a $16.6 trillion national debt.
Republicans instead want to cut the cost of huge social safety nets, including Social Security and Medicare, that are becoming more expensive in a country with an aging population.
Meantime, Obama is edging closer to having to enforce the meat-axe approach.
By midnight, he is required to issue an order to federal agencies to reduce their budgets and the White House budget office must send a report to Congress detailing the spending cuts. In coming days, federal agencies are likely to issue 30-day notices to workers who will be laid off.
STILL TIME ON THE CLOCK
The question now appears to be how long the budget cuts will be allowed to happen. If budget cuts last only a few weeks, it is plausible they could have a marginal impact on growth and on employment. This is because some budget cuts won't translate into immediate spending cuts.
The Defense Department, for example, will probably not begin furloughing some 800,000 civilian workers until late April, after which these workers will work one day less per week. Budget cuts for capital spending could also be delayed.
The CBO estimates that only about half of the $85 billion in budget cuts planned from March through September would translate into lower spending during that period.
Once the furloughs and other spending cuts take hold, though, workers will feel the pinch, especially the 2.8 million people employed by the federal government.
Washington stares down start of sequester cuts
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Washington stares down start of sequester cuts
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