Grim words follow US cuts

Obama warns of ripple effect through economy as $103b of budget trimming starts

President Barack Obama warned yesterday of a "ripple effect" through the United States economy that would cost hundreds of thousands of jobs after he reluctantly signed an order to begin US$85 billion ($103 billion) of government cuts.

Obama even called the act "not smart" the day after the cuts officially became government policy, in a move that has been dubbed "sequestration" and has plunged Washington into another political crisis.

"The pain will be real. Many middle-class families will have their lives disrupted in a significant way," he said in his weekly address.

Up to 750,000 jobs could be lost, he said, and half a percentage point knocked off US economic growth this year.

"This will cause a ripple effect across the economy. Businesses will suffer because customers will have less money to spend ... These cuts are not smart. They will hurt our economy and cost us jobs."

The sequester originates in a political crisis in 2011, when debates over deficit reduction almost saw the US Government default on its debt payments. To avert that crisis, Democrats and Republicans agreed that, unless they struck a deal on shrinking the country's debt, the cuts to federal spending would begin.

No grand bargain was struck and the cuts - which neither side had intended - are now kicking in.

Over the next 10 years they will represent US$1.2 trillion of slashed spending.

The hardest-hit government sector will be the Pentagon, which has to make US$40 billion of cuts between now and September - about 9 per cent of its budget.

But almost every department, from aviation to the park service, will be hit, with cuts amounting to about 5 per cent of their overall budgets. Only Medicaid and welfare benefits such as food stamps are exempted.

The Federal Aviation Authority has said it will have to close scores of air traffic control towers and the National Labour Relations Board has already given staff 30 days' notice that they could be suspended. Over the next few weeks, more such letters will go out, threatening school services and scores of other government functions.

In his speech Obama blamed the Republicans for inaction, saying their hostility to any sort of extra tax revenues being generated from rich Americans was the root cause of the problem.

Republicans want cuts only on welfare spending, rather than defence, and have insisted on no new taxes. Republican House Speaker John Boehner, at the end of the White House talks on Saturday, was adamant that he will not contemplate any new taxes: "The discussion about revenue is over."

That hard line is popular with the Republicans' right-wing base but has left the party vulnerable to being attacked as too entrenched in its ideology - especially after Obama's resounding win in 2012.

Tightening belts

US$85b programme of government cuts

US$40b of defence cuts

5% of government departments' overall budgets

US$1.2t of slashed spending over the next 10 years

- Observer