Obama Warns Congress of ‘Devastating’ Cuts in Report

Photographer: Brendan Smialowski/AFP/Getty Images

President Barack Obama at a campaign event in Golden, Colorado. Close

President Barack Obama at a campaign event in Golden, Colorado.

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Photographer: Brendan Smialowski/AFP/Getty Images

President Barack Obama at a campaign event in Golden, Colorado.

An Obama administration report cataloguing the impact of $1.2 trillion in looming spending cuts illustrates the stakes as lawmakers debate what to do about the U.S. deficit less than two months before the election.

The White House budget office said the cuts, known as sequestration and set to start in January, would undermine economic investment and cause “severe harm” to initiatives including food-safety inspections, air-traffic control and support for schools. The Pentagon would be forced to juggle accounts to maintain the war effort and delay repairing or buying equipment, according to the report released yesterday.

“Sequestration would be deeply destructive to national security, domestic investments and core government functions,” the 394-page report said. “The administration strongly believes that sequestration is bad policy, and that Congress can and should take action to avoid it by passing a comprehensive and balanced deficit reduction package.”

The report, ordered by Congress, comes less than two months before a presidential election in which President Barack Obama and Republican Mitt Romney have offered starkly different plans to address the government’s red ink. Obama is pressing to raise taxes on the wealthiest Americans to help pay for government programs. Romney argues that doing so would hit small businesses and hurt job creation at a time when the unemployment rate has been above 8 percent for 43 months.

Punitive Step

The automatic, across-the-board reductions would begin on Jan. 2, unless Congress adopts an alternative, and would designate annual reductions through 2021. The sequestration is a punitive step lawmakers imposed upon themselves for failing last year to reach a deal to cut deficits by at least $1.2 trillion over a decade.

The cuts in fiscal 2013 would amount to $109.3 billion, equally drawn from defense and non-defense programs, and would hit agencies in the middle of the government’s fiscal year, according to the Office of Management and Budget report.

The deficit is projected this year to reach $1.1 trillion, which would make it the fourth consecutive year the government has run trillion-dollar shortfalls.

That has contributed to a recent run-up in the debt, which has climbed more than 75 percent in the past four years. At $11.3 trillion, or 73 percent of the nation’s gross domestic product, the publicly held debt this year is projected to reach the highest level since shortly after World War II. Moody’s Investors Service warned earlier this week it may join Standard & Poor’s in downgrading the U.S.’s credit rating if lawmakers don’t agree next year on a deficit plan.

Partisan Finger-Pointing

Neither party wants to see the cuts imposed, though there is little agreement on what to swap in their place, and lawmakers don’t plan to address the issue in earnest until after the Nov. 6 election.

Obama’s budget advisers said the reductions would affect more than 1,200 budget accounts and blamed Republican lawmakers for focusing strictly on spending cuts. House Republicans have offered “particularly irresponsible approaches” that would “shift the burden of deficit reduction onto the middle class and vulnerable populations and represent the wrong choices for the nation’s long-term growth,” the report said.

A plan endorsed in May by House Republicans would replace much of next year’s cuts with savings carved out of food stamps, Medicaid, federal workers’ benefits, the Consumer Financial Protection Bureau and other spending programs. They would allow some of the scheduled cuts to take effect, such as the 2 percent reduction in Medicare.

‘Common-Sense’ Cuts

The Republican plan “replaces the president’s dangerous defense sequester with common-sense spending cuts and reforms,” said House Speaker John Boehner, an Ohio Republican. “But with only a few months before they’re scheduled to go into effect, President Obama and Senate Democrats have taken no action whatsoever to avert these cuts.”

The automatic cuts would hit a broad swath of the government, and those who rely on it, the White House report said. They would shrink the Federal Aviation Administration’s budget by $1 billion, which may lead to a drop in airline travel of as much as 10 percent, according to a study released last month by the Aerospace Industries Association, an Arlington, Virginia-based trade group.

The Air Force’s $21.3 billion aircraft procurement request would be cut $2 billion, affecting top aircraft and electronics makers Lockheed Martin Corp. (LMT), Boeing Co. (BA), Northrop Grumman Corp. (NOC), Raytheon Co. (RTN) and L-3 Communications Holdings Inc. (LLL) Huntington Ingalls Industries Inc. (HII) and General Dynamics Corp. (GD) would be hit by a $2.1 billion cut to the Navy.

Embassy Security

The National Institutes of Health, which provides medical research grants, would lose $2.5 billion. The Federal Bureau of Investigation would take a $742 million hit. Embassy security would be reduced by $129 million. More than $1.4 billion would come out of the National Aeronautics and Space Administration’s budget. State and local governments would also face more than $250 million in cutbacks in subsidies on bonds they sold to pay for public works projects under Obama’s stimulus program.

While the law calls for reductions totaling $1.2 trillion over the next nine years, the real cuts amount to $984 billion. That’s because it allows lawmakers to chalk up 18 percent of those savings to reduced interest payments on the debt, which the report shows would amount to $216 billion.

Overall, sequestration would impose a 9.4 percent cut in defense discretionary spending, and an 8.2 percent reduction in nondefense discretionary accounts, according to the report. Nondefense mandatory programs would take a 7.6 percent hit and defense-related mandatory programs would be slashed by 10 percent.

The administration, charged with implementing the savings, emphasized the law gives it little discretion in apportioning the cuts.

‘Single Exception’

“With the single exception of military personnel accounts, the administration cannot choose which programs to exempt, or what percentage cuts to apply,” the report says. “These matters are dictated by a detailed statutory scheme.”

For the Pentagon, the reductions wouldn’t affect the war effort, the report said. Still, the cuts “would result in a reduction in readiness of many non-deployed units, delays in investments in new equipment and facilities, cutbacks in equipment repairs, declines in military research and development efforts, and reductions in base services for military families.”

Some programs are exempt from the cuts. Certain mandatory programs such as Social Security are off limits, and the administration has said military pay and veterans’ health-care programs should be left alone. Other programs, such as student loans, are subject to special rules.

To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net; Brian Faler in Washington at bfaler@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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