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Sequester cuts implementation may impact US economic growth

Obama fails to reach last-minute compromise with Republicans.

The implementation of automatic spending cuts, also known as sequestration, in the US may impact the country’s economic growth. These cuts, which will hit everything from housing vouchers to naval shipbuilding, are effective 1 March.

Estimates of the US economic growth in the fourth-quarter of 2012 were revised from an annualised fall of 0.1 per cent to a rise of 0.1 per cent, showing how the economy will struggle with a big tightening of fiscal policy that includes $85bn in cuts for the rest of this fiscal year, according to the Financial Times (FT).

The country’s fourth-quarter GDP was estimated low due to huge cuts in business inventories and federal defence spending. The main change was an upward revision to net trade, which added 0.24 percentage points to growth, having subtracted 0.24 percentage points in the first estimate.

Meanwhile, the US President Barack Obama has failed to reach a last-minute compromise with Republicans in Congress. He, however, summoned congressional leaders to meet in the White House on Friday but there was little sign of movement towards a solution.

The International Monetary Fund (IMF) warned that it would cut its growth forecast for the US as the Congressional Budget Office (CBO) said growth would be 0.6 percentage points slower because of sequestration.

The CBO said there would be 750,000 fewer jobs at the end of 2013 if sequestration begins

“I fear that the impact of the sequester would cut a half to 1 per cent off the growth rate and would put us back in the circumstance where growth is not fast enough to shrink the unemployment rate,” said Austan Goolsbee, former chairman of Obama’s council of economic advisers, in testimony to Congress.

Without hinting that his acceptance to compromise on Obama’s demand that a replacement for sequestration will include higher tax revenues, John Boehner, Republican speaker of the House of Representatives, said: “The president got his revenues, and he got it his way, through higher rates,” said Mr Boehner. “And given those facts, the revenue issue is now closed.”

“Tomorrow I will bring together leaders from both parties to discuss a path forward. We should work together to reduce our deficit in a balanced way – by making smart spending cuts and closing special interest tax loopholes,” Obama said on Thursday.