Author`s name Dmitry Sudakov

USA deals with budget deficit

U.S. authorities are getting ready to reduce the budget deficit. This is especially important on the eve of the promised measures to cut public spending. Restoring order in the public sector requires sacrifice from the country, and economists should minimize the inconveniences that this may cause. It does not mean that it will work, but one must try.

March 1st will not be the first day of spring for Washington - it will be the day of possible automatic sequestration. With the current state of affairs, the government will have to cut public spending by $85 billion for the current year and then by nearly $110 billion a year. It is clear that such a development does not make anyone happy, so economists are desperately looking for a way out.

A few days ago, the White House was presented with a new project to reduce the budget deficit by $2.4 trillion in ten years - from 2014 to 2023, CNN said. The project was developed by Democrat Erskine Bowles, the former head of Bill Clinton's administration, and former Republican Senator, Alan Simpson. They both served as co-chairmen of the commission on budget reforms, established by U.S. President Barack Obama, Interfax said.

The above-mentioned amount will help stabilize the U.S. national debt at 70% of GDP or less, which is considered the threshold of stability for the U.S. economy, experts say. The White House is prepared to reduce the deficit by $1.5 trillion in ten years, which will make up $4 trillion taking into account the previously agreed measures. Thus, the public debt will be reduced to 73% of GDP by the end of the decade from the current 100% of GDP.

According to the project, the spending will be cut through reductions in health insurance programs - Medicare and Medicaid - by $600 billion, as well as through the attraction of new tax revenues of $600 billion by reducing tax concessions. In addition, one should reduce discretionary spending by $1.2 trillion, including on complementary programs in the field of health, education, care for veterans, intelligence and agriculture.

"The smooth reduction of government spending during the period of ten years in the amount of $2.4 trillion, according to various estimates, is optimal to stabilize the national debt at a relatively comfortable level for Americans - about 70% of GDP. This is a reasonable proposal, although it is unclear how the Congress reacts to it. There are reasons to believe that more or less substantive decisions will be voiced next week. For the time being, investors should prepare for any twists that this story may take," Investkafe analyst Anna Bodrova told Bigness.ru.

Indeed, the Republicans, who control the lower house of the Congress, have not suggested anything in response yet, but it may go about the same amount of $4 trillion. Bowles and Simpson are not certain of the possibility of compromise, as congressmen are primarily "interested in the opposite side to lose, and, in fact, they constantly rub mistakes in each other's faces."

On February 19th, U.S. President Barack Obama called on the Congress at a news conference to do everything possible to prevent sequestration.

"People will lose their jobs," he said. "The unemployment rate might tick up again."

"So far at least, the ideas that the Republicans have proposed ask nothing of the wealthiest Americans or the biggest corporations. So the burden is all on the first responders, or seniors or middle class families," Obama said.

Automatic sequestration will definitely affect the economy, especially in the social sphere. There is no hope that it will affect only defense programs, and the U.S. has only been cutting health programs, education, research and development. 

As estimated by the U.S. Congressional Budget Office, the implementation of these measures will slow down the GDP growth in 2013 by 0.6 percentage points and cut 750,000 new jobs. However, the stabilization of the limit of the public debt reduces the risk of recession.

Goldman Sachs top economist Jan Hatzius, who was quoted by TV channel Russia 24, believes that "it is important that the Republicans in the U.S. Congress rejected the idea of raising the debt limit as a way to seek additional budget cuts. Thus, the risk for the American GDP to drop by more than 1.5-2 percentage points in response to budget policies will be reduced significantly."

Maybe sooner or later the economic growth in the country will speed up, and the situation will not look so dramatic.

Valentin Gridin.