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Doha: The US sequester was the last unfinished instalment of the so called ‘fiscal cliff’, wherein automatic government spending cuts are put in place along with tax increases. The sequester involves an estimated $1.2 trillion in spending cuts over the next 10 years (starting at $85bn per year and rising over time), if completely implemented.
In total, the fiscal cliff involved $600bn of tax increases and spending cuts per year, which were due to be enacted on January 1. However, the US Congress reached a last minute agreement over reducing the tax increases, but the sequester was pushed back to March 1. Congress has failed to reach any agreement on downsizing the sequester and the automatic cuts are, therefore, now in place.
There was greater pressure on Congress to do something about the tax increases as, if fully implemented, these were expected to cut US GDP output by 4 percent in 2013 and push the economy into recession. However, as they are considerably smaller than the tax increases, the spending cuts are only expected to slow GDP growth by about 0.6 percent in 2013 to 1.4 percent from the earlier baseline forecast of 2.0 percent, based on consensus expectations.
Immediate concerns about the sequestration were put to rest with the release of recent positive US GDP and jobs data. Real GDP growth for the fourth quarter of 2012 was revised upward from the initial estimates of -0.1 percent to 0.1 percent. The US economy also nearly doubled its job creation in February to 236,000 jobs, from 119,000 created in January. This in turn brought down the unemployment rate to 7.7 percent from 7.9 percent.
However, it is feared that the momentum of growth could be cut in its track by the sequestration. The $85bn in budget cuts includes $43bn in discretionary defence spending, $27bn in discretionary non-defence spending and $15bn in mandatory non-defence spending.
According to the Congressional Budget Office, budgetary resources for defence will be cut by around 8 percent across the board and by around 5 percent to 6 percent for non-defence. While the impact of the spending cuts on economic growth seems to be limited in the short-term, the growing concern in the medium term relates to job creation.
With an already weak global economic recovery, and the impact of the tax increases and spending cuts, coupled with political wrangling over the debt ceiling, this is likely to present even more downside risks for the global economy in 2013, according to QNB Group.