As part of the fiscal cliff deal, automatic across-the-board cuts to spending were put off until March 1. However, this leaves less than a month to work out a deal on a larger package or a smaller deal that would again postpone the cuts.
President Barack Obama warned on Tuesday that triggering of automatic spending cuts could cause serious consequences for the US economy. Obama was able to get a bill passed to raise the debt ceiling and signed the bill yesterday that temporarily suspends the $16.4 trillion limit. This will enable the government to pay $450 billion on interest payments and other obligations. As well as suspending the debt limit until May 18, the bill also suspends pay for Congress members if their chamber fails to pass a budget resolution by April 15.
The Defense Department and the private sector would be among the hardest hit by the cuts. Obama urged Congress to act before the deadline, and suggested that some scheduled cuts could be replaced by others. The president suggested that even if a big package could not be reached then a more limited package should be negotiated to ensure the automatic cuts were avoided:
“If Congress can’t act immediately on a bigger package, if they can’t get a bigger package done by the time the sequester is scheduled to go into effect, then I believe that they should at least pass a smaller package of spending cuts and tax reforms that would delay the economically damaging effects of the sequester for a few more months until Congress finds a way to replace these cuts with a smarter solution. ... There is no reason that the jobs of thousands of Americans who work in national security or education or clean energy—not to mention the growth of the entire economy—should be put in jeopardy.”
Obama is anxious to increase government revenue in order to fund programs and reduce the debt. He advocated closing or reducing tax loopholes and deductions, saying, “There is no doubt we need additional revenue, coupled with smart spending reductions in order to bring down our deficit.”
Obama rejects the view that he is responsible for the sequester, but Speaker John Boehner thinks otherwise: “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.”
Obama was vague about what he had in mind for a deal and said only, "Let's keep on chipping away at this problem together, as Democrats and Republicans, to give our workers and our businesses the support that they need to thrive in the weeks and months ahead."
Alan Krueger, an economic adviser to Obama, even blamed a drop in the US GDP that was unexpected on the looming sequester cuts: "A likely explanation for the sharp decline in federal defense spending is uncertainty concerning the automatic spending cuts that were scheduled to take effect in January, and are currently scheduled to take effect on March 1st."
Should the sequester cuts kick in, defense and domestic spending would be cut by about $1.2 trillion over the next decade.