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Tuesday, March 5, 2013

Sequester in the U.S. Economy

Coming to terms with the American Taxpayer Relief Act of 2012 to tackle the fiscal cliff, the U.S. are in a dilemma over the way forward. After much reluctance, on March 1, President Obama finally approved the Government spending cuts referred to as “sequester.” According to him, “These cuts are not smart. They will hurt our economy and cost us jobs. And Congress can turn them off at any time - as soon as both sides are willing to compromise.” However, the “other side” is not willing to even discuss the alternatives.


Proposed alternatives include tax hikes and withdrawal of tax-breaks for wealthy Americans to increase Government revenue. As it stands now, the Government agencies are mandated to trim $85 billion in expenditure by October 1, 2013 and a total of $1.5 trillion over the next 10 years. While, this move is not likely to completely tame the monstrous $16 trillion Government debt, it is sure to impact the economy. Reeling under the pressures of the opposition, Obama has categorically termed the spending cuts as “dumb.” An estimated 750,000 jobs will be lost at a time when the nation needs to tackle unemployment. Special education programs, law enforcement agencies, Department of Agriculture, loan guarantees to SMEs, and FEMA will be among the most-affected. Sequestration will impact defense partially, while Medicaid, Social Security, Pell Grants and benefits for veterans will be exempt.
Most experts fear a slow and certain damage as time progresses. However, some disagree. Sequestration for the current year comes at about 2.4% of the last year’s expenditure, which according to them is not likely to have far-reaching effect on the GDP. The growth may be retarded, but recession is a distant possibility. However, there seems to be a consensus about the inappropriateness of the latest move due to the political stalemate and the certainty of a net negative result. 
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