Small spending cuts to have little economic impact

Filed under: Daily News,Government Federal |

The first phase of a deal to raise the government’s borrowing limit would pose little threat to the economy in the short term because almost none of the spending cuts would occur before 2014.

Discretionary spending, which excludes Social Security, Medicare and Medicaid, would be cut by only $7 billion in 2012 and $3 billion in 2013, according a summary by Senate Democrats. That’s a tiny fraction of the nation’s $14 trillion economy.

“That’s certainly inconsequential for the economy if that’s all it is,” said Mark Vitner, a Wells Fargo Securities economist.

The independent Congressional Budget Office offered its own analysis Monday. It said the agreement would reduce government spending by $25 billion next year. That’s compared to current law, which factors in a projected increase in spending.

The first phase of cuts would reduce spending by $917 billion over 10 years. A congressional committee would decide on a second phase of cuts totaling $1.5 trillion.

The Obama administration had said the government would have run out of cash to pay its bills without an increase in the $14.3 trillion borrowing limit by Aug. 2.

The deal comes as the U.S. economy is worsening. Manufacturing activity dropped to its lowest level in two years, according to a survey released Monday.

And overall economic output dropped below 1 percent in the first six months of this year, according to a government report Friday. Government spending fell for the third straight quarter, contributing to the slower growth.

Democratic lawmakers advocated smaller cuts over the next two years to avoid hurting the fragile economic recovery, said staffers from both parties with knowledge of the negotiations. The staffers said Republicans wanted upfront cuts totaling tens of billions of dollars. The limited cuts during the first two years represent a major give-back by Republican negotiators, the staffers said.

The staffers spoke on condition of anonymity because they were not authorized to discuss the negotiations.

The overall approach follows advice offered this year by Federal Reserve Chairman Ben Bernanke. In testimony to Congress, Bernanke has advocated for a long-term deficit-reduction plan, but has cautioned lawmakers not to make deep cuts while the economy remains weak.

The deal enables the government to avoid defaulting on the nation’s debt. Credit ratings agencies may still downgrade their ratings of U.S. debt.