Will government spending cuts be enforced in March?

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Two days prior to the release of the BLS’ “The Employment Situation – January 2013” report, the Bureau of Economic Analysis published its latest “advance” estimate regarding Q4 2012 GDP.

The estimate’s findings shocked many financial experts. Despite a rise in personal consumption expenditures and business investment, real GDP declined by 0.1 percent last quarter, the first quarterly decrease since 2009, leading some economists to ask: why?

According to Alan Krueger, chairman of the Council of Economic Advisers, one of the direct causes of the GDP contraction was a reduction in federal defense purchases. In fact, purchases diminished at an annual rate of 22.2 percent last quarter, the highest quarterly decline since 1972.

“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,” said Krueger.

Last month, the “American Taxpayer Relief Act of 2012” delayed roughly $1.2 trillion worth of government spending cuts. The cuts, which were scheduled to begin on January 1st, will now be enforced on March 1st, unless Congress intercedes.

As a means of reducing the federal budget, government defense and nondefense spending will each be trimmed by approximately $55 billion on an annual basis, from 2013 to 2021. With less spending power, thousands of public sector companies may be forced to cut back employees’ hours, lower salaries, or lay off workers.

For example, the Congressional Research Service has found that 2.1 million employees, including 277,000 federal civilian professionals, may lose their jobs this year if the spending cuts are enforced.

According to the National Association of Manufacturers and the University of Maryland’s Inforum, 907,000 jobs, including 152,000 direct Department of Defense civilian and military positions, may be lost if defense expenditures are reduced by upwards of $48 billion this year.

Meanwhile, according to a report released by the National Education Association, 80,500 educational professionals may be laid off this year if Department of Education and National Head Start Association budgets are condensed.

At the same time, a reduction in the National Institute of Health’s current extramural awards expenditures may be costly for employees, potentially leading to a loss of 33,700 jobs, according to a United for Medical Research study.

Furthermore, according to Econsult Corporation and the Aerospace Industries Association, 66,000 to 132,000 job losses may occur each year, from 2013 to 2021, if the Federal Aviation Administration’s budget is lowered throughout the next nine years.

If Congress does not intervene, and the $1.2 trillion worth of spending cuts is actually enforced, nondefense subsidies will comprise only 2.8 percent of GDP by 2021, according to the Congressional Budget Office. To compare, it has encompassed 4.1 percent of GDP, on average, in recent years.

So, how will Congress react? Will Congressional leaders vote to enforce the spending cuts, or decide to eliminate them? And what type of impact will their decisions have on the United States’ future employment situation?

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