Written with Richard Rubin
Just as the U.S. gross domestic product is taking a hit from lower defense budgets, federal spending cuts viewed as unthinkable a few months ago — $1.2 trillion falling heavily on the Pentagon — are seen as likely to happen starting March 1.
What’s known as budget sequestration, designed to be so draconian that it would push Democrats and Republicans to compromise on taxes and spending, has hardened the parties’ positions. If the cuts occur, they would require $600 billion in across-the-board military spending reductions over a decade that Defense Secretary Leon Panetta called “devastating.”
House Republican leaders, weakened by Obama’s re-election and Democratic gains in the House and Senate, are resigned to accepting the cuts rather than risking a deal with Obama that would mean higher taxes. Democrats see little political benefit in accepting Republican offers to forestall the reductions in exchange for cuts to entitlement programs such as Medicare.
“I want to make sure we save that money,” said Senator Lamar Alexander, a Tennessee Republican. “I’m not going to vote to change it unless we replace it.”
Alan Krueger, chairman of Obama’s Council of Economic Advisers, said the decline in GDP underscores the need for legislation that does away with the automatic spending cuts “to avoid self-inflicted wounds to the economy.”
Congress must “move toward a sustainable federal budget in a responsible way that balances revenue and spending, and replaces the sequester, while making critical investments in the economy that promote growth and job creation and protect our most vulnerable citizens,” Krueger said in an e-mailed statement.
Today’s economic report may not change the underlying political standoff that has prevented Congress from avoiding sequestration.
See the full report on defense cuts and the GDP at Bloomberg.com.