Fiscal Cliff “Deeply Destructive” to U.S. — Obama

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If Congress does not act to counter the impact of the looming fiscal cliff — the $110 billion spending cuts that will go into effect on January 2, 2013 — will have severe effects according to a report from the Obama administration Office of Management and Budget:

Sequestration would be deeply destructive to national security, domestic investments and core government functions.

The automatic cuts, technically called “sequestration,” would chop 2% from payments to Medicare providers, about 9.4% from the U.S. defense budget, and non-defense discretionary would lose about 8.2%. Under the deal struck last year, similar cuts are scheduled to be applied annually through budget year 2021.

The budget cuts are to be combined with the expiration of the Bush administration’s tax cuts, which also expire at the end of 2012, to force a reduction in the federal budget deficit. Neither Democrats nor Republicans favors sequestration, but the dispute over raising taxes for high-income earners has so far precluded a solution acceptable to both sides.

There is little likelihood that any solution will be reached before the November elections, and the short time between then and the end of the year doesn’t augur well for a post-election solution either. At best, a post-election lame-duck session could delay the country’s tumble off the fiscal cliff for a short time to give the next President and Congress time to work out a solution.

Of course if Obama wins, the status quo ante will likely be maintained, even if Republicans win control of the Senate and maintain control of the House. If, as seems very unlikely, the Democrats should control both the White House and both houses of Congress, well, that would be a different story. A Romney win could cause similar confusion unless the Republicans gain control of Congress.

Paul Ausick