Sequestration Cuts Imminent; Government Shutdown Looms

A "balanced mix" of spending cuts and tax reform, Obama continued, "is the best way to finish the job of deficit reduction. The overwhelming majority of the American people—Democrats and Republicans, as well as Independents—have the same view."

But House Speaker John Boehner, R-Ohio, countered the same day in February that Obama "first proposed the sequester and insisted it become law. Republicans have twice voted to replace these arbitrary cuts with common-sense cuts and reforms that protect our national defense." Republicans, he continued, "believe there is a better way to reduce the deficit, but Americans do not support sacrificing real spending cuts for more tax hikes. The president's sequester should be replaced with spending cuts and reforms that will start us on the path to balancing the budget in 10 years."

Lieber predicted there was a more than 60% chance that sequestration will go into effect on March 1. But how long it continues, he said, is unclear. "The odds of it lasting through the entire fiscal year are no worse than one in three. One of the many factors that will determine the policy's duration is how much political and economic upheaval it creates." Lieber said that "credible estimates" put job losses from a seven-month sequester at up to 1 million, with GDP drag up to 0.7%. "A sequester of this magnitude has never occurred, so the execution and impact of it is unknown," he said.

Republicans, Lieber said, "have clearly decided that sequestration provides them with their best leverage to try to extract a large 10-year deficit reduction bill." Consequently, "the GOP leadership and many, many of their rank-and-file are more than willing to allow the $85 billion in cuts to go into effect if they are not fully offset with alternative, targeted reductions." Politically, Lieber continued, "we do not believe that the House GOP leadership can afford to allow a mix of revenue and spending offsets before March 1, which the Democrats will insist upon."

Despite the looming sequestration deadline, Obama noted that economists and business leaders have stated the economy is "poised for progress in 2013."

However, Obama also said that the nation has "seen the effects that political dysfunction can have on our economic progress," citing how the "drawn-out process for resolving the fiscal cliff hurt consumer confidence."

Political dysfunction, he said, "will cost us jobs and hurt our economy."

Indeed, the Congressional Budget Office released in early February its budget and economic outlook for the next 10 years, which stated that if the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $845 billion, or 5.3% of gross domestic product (GDP), its smallest size since 2008. Deficits will continue to shrink over the next few years, CBO said, falling to 2.4% of GDP by 2015.

However, CBO said that deficits are projected to increase later in the coming decade "because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance and growing interest payments on federal debt." As a result, "federal debt held by the public is projected to remain historically high relative to the size of the economy for the next decade."

By 2023, "if current laws remain in place, debt will equal 77% of GDP and be on an upward path," CBO projected.