Obama Orders Cuts That Will Be ‘Slow Grind’ on Economy

March 1 (Bloomberg) -- President Barack Obama speaks at a news conference in Washington about $85 billion in automatic federal spending cuts set to start today, the Violence Against Women Act and same-sex marriage laws. Obama met today with Republican House Speaker John Boehner and other legislative leaders after first a congressional supercommittee and then a new election failed to settle political differences over how to reduce the federal budget deficit. (Source: Bloomberg)

President Barack Obama ordered the start of $85 billion in government spending cuts, beginning a potentially decade-long wave of belt-tightening that risks curbing U.S. economic growth this year.

The White House released the order last night, the deadline set by a law passed two years ago to avoid a debt default, and the Office of Management and Budget sent Congress a detailed list of program cuts. The reductions’ impact will become clear over the next several weeks, as agencies inform affected government contractors and notify employees about furloughs, most of which wouldn’t begin for at least a month.

“What’s important to understand is that not everyone will feel the pain of these cuts right away,” Obama said at the White House earlier yesterday, after meeting with the top four leaders of Congress. “The pain, though, will be real.”

The across-the-board cuts, known as sequestration, were intended to be so onerous that Congress and the president wouldn’t let them occur and would come up with a plan to replace them. Instead, Democrats and Republicans deadlocked on an alternative. Obama insists that any plan must include new tax revenue and Republicans, led by House Speaker John Boehner, reject that approach.

The cuts under the law total $1.2 trillion over nine years. Of that, $85 billion comes out of the budget for the remaining seven months of this fiscal year, making for effective reductions of about 13 percent for defense programs and 9 percent for non-defense programs, according to the OMB.

Government Funding

Obama and Boehner, an Ohio Republican, indicated they would avoid another showdown when spending authorization for government operations expires March 27. After they met at the White House, Boehner said the House would vote on funding legislation so Congress won’t need to deal with the risk of a government shutdown while negotiating an agreement on cutting the deficit. Obama indicated he would sign it.

Obama met for just less than an hour at the White House with Boehner, Senate Republican leader Mitch McConnell of Kentucky, Senate Majority Leader Harry Reid, a Nevada Democrat, and House Democratic leader Nancy Pelosi of California to discuss the way forward.

If they stay in effect, the spending cuts eventually may lead to longer waits for air travelers, delays in production permits for oil and gas drilling, shorter opening hours at national parks, and the closing of meat plants that the Agriculture Department doesn’t have the manpower to inspect.

Markets View

Private and government economists have said the cuts may trim economic growth. Investors have signaled they aren’t concerned about the impact on the $15.8 trillion U.S. economy.

The Standard & Poor’s 500 Index (SPX) has risen 6.4 percent this year and the dollar led gains in world markets last month.

The S&P 500 gained 0.2 percent to 1,518.20 yesterday in New York trading, after dropping as much as 0.9 percent earlier as consumer confidence increased and manufacturing grew at the fastest pace since June 2011. The Dollar Index, which tracks the currency against six U.S. trading partners, rose 0.4 percent.

Once Obama’s order went out, the budget office transmitted a document to Congress itemizing reductions to hundreds of federal programs, updating an earlier report to lawmakers.

“The cuts required by sequestration will be deeply destructive to national security, domestic investments, and core government functions,” acting White House Budget Director Jeffrey Zients said in a letter to Boehner accompanying the budget office list.

Park System

Medicare will see a 2 percent reduction, while the National Institutes of Health, which funds medical research, will be cut by 5 percent, or about $1.5 billion, according to the OMB. Space operations at the National Aeronautics and Space Administration will be cut by 5 percent, or $212 million, and operations for the national park system, which includes 398 parks across the country, would get a reduction of 5 percent, or $113 million.

Agencies began technical procedures to deal with immediate effects. In one example cited by administration officials, computer systems had to be taken offline and reset for the Internal Revenue Service to cut $210 million in payments to municipalities with projects under the Build America Bonds program for infrastructure financing.

Separately, Cabinet departments issued letters to governors explaining the impact on states.

Congress’s ‘Failure’

A letter to Governor John Kasich of Ohio from U.S. Housing Secretary Shaun Donovan says that Obama was issuing the sequestration order “due to the failure of Congress.”

In a letter to Governor Bob McDonnell of Virginia, U.S. Deputy Defense Secretary Ashton Carter wrote that while “we do not yet have a complete inventory of the required cutbacks,” the known reductions include $146 million in funding for Army bases.

Carter said the department will keep states informed “as we compile a more complete list.”

Speaking after his meeting with the lawmakers, Obama said agreement on a deficit-reduction package will be reached once members of Congress hear from voters feeling the pinch of cutbacks in government programs.

“There is a caucus of common sense up on Capitol Hill,” Obama said. “It’s a silent group right now, and we want to make sure that their voices start getting heard.”

Tax Revenue

Boehner left the White House saying Republicans won’t budge from their rejection of raising tax revenue again as part of the negotiations on sequestration.

“The president got his tax hikes on Jan. 1,” Boehner said, referring to the deal at the end of last year that let income tax rates rise for top incomes. “The discussion about revenue, in my view, is over.”

Obama has urged replacing sequestration with a combination of reduced spending, including in entitlement programs, and higher revenue from closing loopholes in the tax code for the wealthiest Americans.

Pelosi said House Democrats are prepared to consider ways to reduce spending for Medicare, Social Security and other entitlement programs as long as Republicans are willing to compromise on “their sacred cows -- tax giveaways for special interests” and “excessive deductions for the wealthiest people in our country.”

Republicans would be willing to close tax loopholes, though not to replace spending cuts, Boehner’s office said.

“I will not be part of any back-room deal and I will absolutely not agree to increase taxes,” McConnell said in a statement.

Obama said he can’t lock both parties in a negotiating session until a deal is struck.

“I am not a dictator; I’m the president,” Obama said. If McConnell and Boehner want to leave town without a deal, “I can’t have Secret Service block the doorway.”

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Margaret Talev in Washington at mtalev@bloomberg.net

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

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