A Sturdier US Economy Can Withstand Budget Cuts
Why less concern this time?
The stakes aren't nearly as high as they were two months ago, when lawmakers engaged in a budget standoff over the so-called fiscal cliff. Economists had warned that the cliff's tax increases and spending cuts would send the economy back into recession if they remained in place for much of 2013.
By contrast, no one is talking about a recession this time, no matter what Congress does or doesn't do. The financial squeeze will be milder. And it will be delayed.
For one thing, the cuts are smaller than they seem: Actual spending will likely drop $44 billion in the budget year that ends Sept. 30, according to the Congressional Budget. That's only slightly more than 1 percent of federal spending.Of that, about 80 percent will come from discretionary programs, which includes everything from environmental protection to defense spending. The rest will come from Medicare and other entitlement programs. What's more, federal agencies must give workers a month's notice before imposing furloughs, which will likely force many to take one day a week of unpaid leave indefinitely. So the pay and spending power of government workers and many contractors won't be affected until April at the earliest. Perhaps more important, the delay gives lawmakers time to seek a deal that might retroactively reverse the spending cuts before they could do much damage to the economy. "If it lasts a matter of a few weeks or a few months, I don't think it will have any measurable impact on growth," Baumohl says. Scott Anderson, chief economist at the Bank of the West, estimates that if the budget cuts lasted only through March, economic growth would drop just 0.1 percentage point in 2013. That change would reduce his estimate of growth for the year from 1.8 percent to 1.7 percent.
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