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The US sequester was the last unfinished instalment of the so called ‘fiscal cliff’, wherein automatic government spending cuts are put in place along with tax increases. The sequester involves an estimated US$1.2trn in spending cuts over the next ten years (starting at US$85bn per year and rising over time), if completely implemented. In total, the fiscal cliff involved US$600bn of tax increases and spending cuts per year, which were due to be enacted on January 1st 2013.
 
However, the US Congress reached a last minute agreement over reducing the tax increases, but the sequester was pushed back to March 1st. Congress has failed to reach any agreement on downsizing the sequester and the automatic cuts are, therefore, now in place.
 
  US Real GDP
 
There was greater pressure on Congress to do something about the tax increases as, if fully implemented, these were expected to cut US GDP output by 4% in 2013 and push the economy into recession. However, as they are considerably smaller than the tax increases, the spending cuts are only expected to slow GDP growth by about 0.6% in 2013 to 1.4% from the earlier baseline forecast of 2.0%, based on consensus expectations.
 
Immediate concerns about the sequestration were put to rest with the release of recent positive US GDP and jobs data. Real GDP growth for the fourth quarter of 2012 was revised upwards from the initial estimates of -0.1% to 0.1%. The US economy also nearly doubled its job creation in February 2013 to 236,000 jobs, from 119,000 created in January 2013. This in turn brought down the unemployment rate to 7.7% from 7.9%. However, it is feared that the momentum of growth could be cut in its track by the sequestration.
 
The US$85bn in budget cuts for 2013 includes US$43bn in discretionary defense spending, US$27bn in discretionary non-defense spending and US$15bn in mandatory non-defense spending. According to the Congressional Budget Office (CBO), budgetary resources for defense will be cut by around 8% across the board and by around 5-6% for non-defense. While the impact of the spending cuts on economic growth seems to be limited in the short-term, the growing concern in the medium term relates to job creation. It is estimated that 750,000 jobs could be lost if the budget cuts stay in place. This, in turn would have further negative implications for long-term growth.
 
Looking ahead, the heightened concern for both the world’s largest economy and the global economy is the increasing levels of uncertainty caused by the inability of the US Congress to reach a consensus. After three years of budget disagreements between the Democrats and the Republicans, their differences are becoming increasingly firmly entrenched. The next showdown will come when the debt ceiling needs to be raised again. The debt ceiling has been temporarily lifted on the basis that it will be reinstated on May 19th at around US$450bn above the outstanding debt level at that time. It is expected to take around three months for actual debt to rise to a level that will require a further increase in the debt ceiling. Prior to being suspended, the debt ceiling was US$16.4trn.
 
With an already weak global economic recovery, and the impact of the tax increases and spending cuts, coupled with political wrangling over the debt ceiling, this is likely to present even more downside risks for the global economy in 2013, according to QNB Group.
 

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