Blame game gets louder with budget cuts looking inevitable

WASHINGTON (Reuters) - A day before sweeping budget cuts begin, the White House and Republicans blamed each other on Thursday for failure to prevent a fiscal crisis which the International Monetary Fund warned could slow the U.S. and world economies.

Absent a highly unlikely last-ditch deal, the $85 billion in cuts across federal government agencies start on Friday.

While Democrats and Republicans disagree about how severe the damage will be to public services like air traffic control and law enforcement, the IMF said the economic recovery would likely be harmed by the automatic spending cuts known as "sequestration."

"We will see what happens on Friday, but everybody is assuming that sequestration is going to take effect," IMF spokesman William Murray said. "What it means is that we are going to have to reevaluate our growth forecasts for the United States and other forecasts," he added.

The full brunt of the automatic cuts will be borne over seven months and Congress can stop them at any time if the two parties agree on how to do so.

That makes it difficult to say how the belt tightening will hit ordinary Americans. President Barack Obama's administration is warning that Navy ships could lie idle and children would lose out on vaccinations if the cuts are not halted.

The IMF likely would shave at least 0.5 percentage point off its 2013 U.S. economic growth forecast of 2 percent if sequestration is fully implemented.

Put into law in 2011 as part of a bipartisan solution to an earlier fiscal emergency, sequestration is unloved by both parties because of the economic pain it will cause.

Few believed two years ago that the cuts would come into force but, unable to agree on any other way to reduce the budget deficit, political leaders are pointing fingers at each other now that the spending reductions appear inevitable.

"It is the president's sequester. It was his team that insisted upon it," Republican House of Representatives Speaker John Boehner said.

White House spokesman Jay Carney said Republicans' refusal to compromise by agreeing to close tax loopholes on the wealthy was one reason why the cuts might be unavoidable.

"Compromise represents willingness to accept policies that aren't 100 percent of what you want. The president has done that again and again. Unfortunately, Republicans seem to be unwilling to do that when it comes to the sequester, so the sequester may take place," he told reporters.

Obama wants to end tax breaks for oil and gas companies and the lower "carried interest" tax rate enjoyed by hedge funds.

Carney said both sides had agreed to the spending cuts, half of which will come from the defense budget and half from non-defense domestic programs.

"It was designed as policy that would never come into effect. Because it was so onerous for both sides, it would compel Congress to reach a compromise," Carney said.


Obama will meet congressional leaders in the White House on Friday for last-minute budget talks but hopes were low for a deal.

"Tomorrow I will bring together leaders from both parties to discuss a path forward. As a nation, we can't keep lurching from one manufactured crisis to another. Middle-class families can't keep paying the price for dysfunction in Washington," Obama said in a statement.

While Washington politicians have tried to disown any responsibility for the cuts, recent polls show that many Americans welcome lower government spending.

An NBC/Wall Street Journal poll released on Wednesday showed 53 percent of Americans preferred the planned cuts or even greater spending cuts than no cuts at all.

Neil Whitman, 62, who runs Dunhill Staffing, an employment company based in Mt. Pleasant, South Carolina, said Washington had just authorized spending of around $60 billion in relief for Superstorm Sandy.

"We spent that in a blink of an eye," he said. "You take $85 billion from somewhere else. So what?"

Whitman said he doubted the horror stories emerging from Washington of public services decimated by sequestration.

"To me, it's political," he said. "I think we need to control spending, but we need to stop telling the American people, 'I don't know if we can guarantee your safety on the airplanes.'"

But U.S. government workers normally unfazed by political gridlock are angry that they will be disproportionately hurt.

"It's like a bull's eye," said Jay Matthews, who works in the chief counsel's office at the Internal Revenue Service in Washington. "They target us because they think we make too much money. And they target us because they think we're lazy."

The cuts threaten to puncture the affluence of the U.S. capital and its suburbs, where incomes and house prices have benefited from secure government jobs with good salaries. The area is home to 375,000 federal workers.

Debate over the run-up to sequestration is at the root of a dispute between the White House and famed Washington journalist Bob Woodward, who is known for his groundbreaking reporting of the Watergate scandal in the 1970s.

Woodward this week accused one of Obama's senior economic officials, Gene Sperling, of threatening him in an email for reporting that the White House was "moving the goal posts" in the budget talks.

The Senate voted on Thursday against plans by both Democrats and Republicans to replace the cuts.

The Republican plan would have let the cuts go into effect on Friday, but required Obama to submit an alternative $85 billion spending reduction plan to Congress by March 15, thus allowing more flexibility on how the cuts would be carried out.

The Democratic proposal would have replaced the across-the-board cuts mainly with tax increases on the rich coupled with spending cuts. Some of those would be achieved by eliminating crop subsidies for large agricultural companies. More savings would be through minor defense cuts in later years.

(Additional reporting by Ian Simpson and Anna Yukhananov in Washington and by Samuel P. Jacobs in New York, Writing by Alistair Bell; Editing by Jim Loney)

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