Things could turn ugly - for the US and the world

 

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The sequester. Washington couldn’t have picked a more awkward title for the series of cuts that beginning today will shave some $85bn (£56bn) from the budgets of various government departments over the course of this year alone.

There is still time for an agreement to be hammered out between the Republicans and Democrats – the cuts, worth more than $1 trillion over the next decade, will be “a slow-motion train wreck”, according to the Bipartisan Policy Centre in Washington – but if no agreement is reached, the chop could have consequences far beyond these shores.

First, in the US, where the economy has barely recovered from the recession induced by the financial crisis, the cuts will dampen growth. The IMF, which is currently forecasting GDP expansion of two per cent this year, warned as much, saying if the cuts are fully implemented, it would likely trim its 2013 growth forecast for the US economy by 0.5 per cent. That alone will have an impact on the world economy. For all the talk of “de-coupling”, the financial crisis showed how, if the US economy sneezes, the world economy still comes down with a cold.

Meanwhile, the new US Secretary of State, John Kerry, has warned how reduced funding would lengthen waiting times for visas at US outposts. Security assistance will also be cut, hitting efforts to disrupt drug cartels in Latin America.

So, sequester, that ugly word, might in fact be appropriate: the potential consequences won’t be pretty. That said, the current debate is just a curtain-raiser. The real fight will be joined in May, when the debt ceiling, currently suspended by a temporary law, will come back on the agenda.

Although many civilian employees at the Pentagon, for example, are likely to face regular periods of temporary unpaid leave before May, the whole issue of how deep and how fast to cut the deficit will be examined afresh when President Obama applies to Congress for a higher limit on the national credit card. Then the furloughs might end – or they might turn into permanent lay-offs.

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