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A dysfunctional U.S. government in spotlight as sequester talks stall

Reporters listen to U.S. President Barack Obama speak about the sequester after he met with congressional leaders at the White House in Washington March 1.


U.S. President Barack Obama and congressional leaders ended a White House meeting without an agreement to mute or delay $85-billion (U.S.) in spending cuts, raising new questions about the functionality of the U.S. political system and signalling the start of yet another budget battle.

Few expected the President and Democratic and Republican leaders in the Senate and House of Representatives to settle their differences over the "sequester," across-the-board spending cuts that Mr. Obama must trigger by midnight Friday.

U.S. stock markets were little changed in the wake of Washington's latest failure to co-operate, which suggests investors anticipate politicians will yet resolve to blunt the effects of sequestration. Mr. Obama told a press conference that he would continue to seek an agreement to blunt the full impact of sequestration, which could result in tens of thousands of lost public service jobs and a reduction of economic growth by a half of a percentage point.

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"There is a caucus of common sense up on Capitol Hill, but it's a silent group right now," Mr. Obama said. While it may take a "couple of weeks" or a "couple of months" of negotiating, "my view is ultimately that common sense prevails," Mr. Obama said.

The "sequester" was designed to force an enlightened negotiation over narrowing the U.S. bloated budget deficit, which has exceeded $1-trillion for four consecutive years. The thinking was that the prospect of $1.2-trillion of indiscriminate budget cuts over a decade – split roughly evenly between discretionary spending and the Defence Department – would force politicians to come up with a more elegant solution.

Instead, opponents dug in. The President demanded that at least some of the spending cuts in the "sequester" be converted into tax increases on big business or the wealthy. Republicans refused, and sought only to ease the blow on defence by proposing deeper cuts at other government departments and agencies.

The debate over sequestration has lacked the urgency of previous budget battles; most recently, the row over the "fiscal cliff," which lawmakers resolved in a last-second agreement in the wee hours of New Year's Day, avoiding a massive tax increase that risked devastating consumer confidence and spending.

That's because sequestration is less critical, at least for now.

If left unchanged, the $85-billion in spending that must be cut between now and the end of the current fiscal year in September could slow economic growth to 1.5 per cent in 2013 from 2 per cent, according IHS Global Insight, a research firm.

But the immediate impact will be light. Agencies must cut 10 per cent of their budgets, an order that mostly will be carried out by reducing salaries. Overtime budgets will be eliminated immediately, and managers will distribute furlough notices. However, federal workers are protected from furlough for at least a month after receiving notice, suggesting the biggest impact on service and the economy still is a month away.

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Between then and now is a more crucial budget deadline.

By March 27, Congress must pass a new budget, or agree to extend existing provisions. Failure to do one or the other would result in a government shutdown – a prospect that many in Washington say should focus the minds of lawmakers better than the "sequester," which has a certain level of political support, especially among Republican lawmakers who won their districts on promises to constrict the size of government. But even those politicians shy away from advocating the cessation of government services as a bargaining chip.

"Neither side wants to have that debate," said Eugene Steuerle, a fellow at the Washington-based Urban Institute and a former assistant secretary at the Treasury Department. "Republicans tend to lose when that issue comes up," he added. "That's not a winning strategy."

Still, the way forward isn't clear. Mr. Obama indicated support for proposals that would delay the "sequester," keeping those cuts separate from negotiations over the budget. Others advocate making the cuts contemplated in the "sequester" part of the budget, although they would be rearranged to blunt the impact on the military and higher priority services.

"It's not an issue of when to reach an agreement, but how," Mr. Steuerle said.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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