April 29 (Bloomberg) -- President Barack Obama told lawmakers in February that automatic federal budget cuts would be a “self-inflicted wound” on the U.S. economy.
Last week, those concerns became reality, as furloughs of air-traffic controllers fueled delays at the nation’s largest airports and provoked anger from travelers and the airline industry. After being inundated with angry e-mails from constituents, Congress voted to end the furloughs -- and then left for recess.
The $85 billion in cuts that went into effect March 1 for fiscal 2013 are now blamed by economists for slowing U.S. growth, even before the full impact of reductions to medical research, programs to help poor children and unemployment benefits are calculated.
“When budget cuts hit high-profile business travelers, you can get Congress to act,” Darrell West, vice president of governance studies at the Brookings Institution, a Washington-based policy group, said in an interview. “I can imagine other areas producing enough pain to motivate members of Congress to take action -- but there isn’t likely to be action across the board.”
Democrats said automatic budget cuts in a process known as sequestration would throw 70,000 children off the Head Start program, eliminate four million meals for seniors, take 600,000 people off a nutrition program for mothers and young children, and mean 125,000 fewer vouchers to help poor families pay for rental housing.
Those changes will unfold even as the U.S. economy grew slower than forecast in the first quarter while government spending slowed, said Alan Krueger, chairman of the White House Council of Economic Advisers.
“These arbitrary and unnecessary cuts to government services will be a headwind in the months to come,” Krueger said in a statement.
Gross domestic product rose at a 2.5 percent annual rate in the first quarter, lower than forecast, after a 0.4 percent fourth-quarter advance, Commerce Department figures released April 26 showed. The median estimate of economists surveyed by Bloomberg called for a 3 percent gain.
While the Congressional Budget Office has estimated the cuts will curb GDP this year by 0.6 percentage point, investors are showing little concern. The Standard & Poor’s 500 Index, which closed April 26 at 1,582.24, is up almost 11 percent this year, while yields on the benchmark 10-year Treasury note fell last week to 1.66 percent, the lowest level since December.
A measure signed March 27 by Obama gave some agencies flexibility in applying cuts, allowing the Agriculture Department to avoid furloughs of meat plant inspectors. The law also reduced defense spending cuts in the current fiscal year, which ends Sept. 30, to $41 billion from a planned $46 billion.
The legislation passed by lawmakers last week allows the Federal Aviation Administration to move as much as $253 million within its budget to end furloughs.
In addition to restoring 15,000 controllers to full employment, the law will end furloughs of 11,000 FAA safety inspectors, technicians and others who perform essential aviation services, said Kori Blalock Keller, a spokeswoman for the Professional Aviation Safety Specialists union.
Several industry organizations and unions formed the group Don’t Ground America, which set up a website for people to voice opposition to the FAA furloughs. The group said on its website that it had sent 20,000 e-mails to Congress and the Obama administration. The industry group Airlines for America and the Air Line Pilots Association, the largest U.S. pilots union, were part of the lobby effort.
Both Democrats and Republicans have complained about an arbitrary budget-cutting process that was originally designed to end an impasse in mid-2011 over raising the government’s borrowing authority.
As a debt deadline approached, Jacob J. Lew, then the White House budget director, proposed that any shortfall in deficit targets be made up with an even split of automatic tax increases and spending cuts.
When Republicans refused, the two sides agreed to automatic spending cuts divided evenly between defense spending, a Republican priority, and domestic programs, a Democratic demand. Veterans’ benefits and entitlement programs such as Social Security and Medicare were mostly spared and the president was given authority to exempt the pay of uniformed military personnel.
“Congress created a pill they expected no one would swallow,” Robert Tobias, director of the Key Executive Leadership Programs at American University in Washington, said in an interview. “Now they’ve swallowed it and no one can figure out how to throw it up.”
House Democrats decried the move to give the FAA budget relief while keeping cuts in programs geared toward the poor.
“Flight delays are just the tip of the iceberg, visible above the waterline for most Americans,” Representative Steny Hoyer, a Maryland Democrat whose district is home to thousands of federal employees and retirees, said April 26 on the House floor. “As time goes on, without a big balanced deficit solution to replace the sequester, more of that iceberg will surface, more Americans will be negatively affected.”
Republicans said any additional budgetary adjustments must take place through a broader deal on spending.
“The main thing from the House’s standpoint is to secure the $85 billion in savings” from sequestration, Representative Tom Cole, an Oklahoma Republican, said in an interview. “We are not wedded to where the cuts are going to come from.”
The leading U.S. defense lobby group said Washington’s budget wrangles were harming corporate planning.
“We’re very concerned that the industrial-base supply chain will be threatened by sequestration as the cuts trickle out contract by contract,” Dan Stohr, a spokesman for the Arlington, Virginia-based Aerospace Industries Association, said in an e-mail. “The uncertainty and instability of funding restricts our industry’s ability to plan and invest.”
The automatic cuts are “very likely” to reduce revenue in 2014, Northrop Grumman Corp. Chief Executive Officer Wes Bush told investors last week. “To think that the sequester somehow just dissipates and goes away and doesn’t impact the future is putting your head in the sand.”
Smaller contractors such as Harris Corp. and Aerovironment Inc. have already taken hits.
Harris, which sells communications equipment to the military, on April 11 cut its profit and sales outlook for the year in part because of order delays tied to sequestration and budget uncertainty. The Melbourne, Florida-based company plans to cut 400 jobs.
Aerovironment, a maker of hand-launched surveillance drones based in Monrovia, California, in March disclosed a 35 percent drop in third-quarter revenue amid a slowdown in military orders.
“We’ve experienced acquisition delays in the past that have impacted planned revenues within a period, but never of this magnitude,” Chief Executive Officer Tim Conver said.
A Salt Lake City unit of L-3 Communications Holdings Inc. cut 190 jobs, or about 4 percent of the now 4,400 person office, on April 18, Jennifer Barton, a spokeswoman for the New York-based company, said in an e-mail. Sequestration was a factor in the firings, according to a company statement.
Social programs nationwide are beginning to see the effects of reduced funding.
Head Start, an educational aid program for poor children funded by the Department of Health and Human Services, is scheduled to cut 70,000 slots for preschoolers, the agency said.
“People in Washington think 5 percent is not a huge cut,” said Yasmina Vinci, executive director of the National Head Start Association, an Alexandria, Virginia-based nonprofit that advocates for the program. “Well, for some programs that’s huge, especially if they’re already working pretty close to the bone.”
In Seaside, Oregon, five-year-old Leonard Hoge learned his ABCs, some Spanish and even some sign language at the federally funded Head Start pre-school program.
The federal budget cuts may deny other children the same opportunities, his mother Kindwyn Hoge said in an interview. She wasn’t impressed Congress chose to help air travelers without ensuring children can stay in a program they love.
“They’re doing all this stuff for airlines,” Hoge said in interview. “They don’t seem to care about little kids.”
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