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US likely to face $1.2 trillion of cuts in March, Republican strategist says

Democrats and Republicans will probably fail to agree measures that would prevent a $1.2 trillion spending cut over the next decade, a senior Republican Party strategist has told RBS.

Beth Myers, who advised Mitt Romney during last year’s race for the White House, said the ‘sequester’ would probably kick in automatically on March 2013, since neither side was in the mood to give ground. She said the Republicans were unlikely to back down because their primary objective – avoiding large-scale military cuts – was likely to happen anyway, irrespective of the sequester situation.

America’s political leaders have, for now, prevented the US falling off a ‘fiscal cliff’ and have successfully put off a decision over whether to raise the debt ceiling until mid-May. However, the urgent problem of how to avoid sequestration – mandatory spending cuts – is looming fast. Without agreement on what to cut, $600 billion of the Pentagon’s budget and an equal value of domestic programmes will automatically be chopped. Talks are deadlocked, with Republicans strongly opposed to raising taxes or cutting military programmes, while Democrats reject Republican demands to axe large parts of the domestic budget.

Economists estimate sequestration would cut 0.5 percentage points off US GDP this year.

Mrs Myers said Republican leaders with whom she was speaking were phlegmatic about a deal since the Democrats were probably going to cut military spending anyway. Chuck Hagel and John Kerry, the men President Obama is appointing to the Defense and State departments, would not protect military spending as their predecessors had, she said.

“Republicans feel these defence cuts are going to happen whether the sequestration happens or not. They are reconciled to those cuts happening, so they are very happy to go forward with the domestic cuts (in addition),” said Mrs Myers, one of the Republican’s most experienced strategists on Capitol Hill.

Hope on the horizon?

Myers did however suggest there was hope of better working relations between Republicans and Democrats after four years of bitter bipartisanship.

“The Republicans have finally figured out, to their enormous credit, that they are not the governing party. They cannot govern from the House. As (House Budget Committee Chair) Paul Ryan said: we need to be prudent; we need to pick our battles.”

Myers knows Paul Ryan well, having led the Romney campaign’s search for his running mate which eventually settled on the influential deficit hawk.

“Paul is very, very smart, very ideological but also very pragmatic,” she said ahead of a dinner with RBS clients. “His real concern is to cut what he sees as the dominant threat to US prosperity: to get the spending, the debt and the deficit under control. He correctly believes the only way to achieve that is through entitlement reforms”.

She added that relations between the Republican-controlled House and the Democrat-led Senate may also be helped by the appointment of Democrat Patty Murray as chair of the Senate Budget Committee. “Paul Ryan has respect and a good working relationship with her. There’s a possibility of a change in dynamics.”

But how, in the short term, can the United States avoid sequestration? Myers said Republicans had already given ground on taxes – agreeing to higher rates on the rich as part of the 1 January deal – and were very unlikely to give more. There might be more room for agreement over tax reform – basically closing some tax loopholes – if they were coupled with domestic budget cuts, she said.

“Is there flexibility (in the Republican Party)?” she asked. “There’s always flexibility”.

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The statements and opinions expressed in this article are solely the views of Beth Myers speaking at an RBS Insight event in London on 29 January 2013 and do not necessarily represent the views of the Royal Bank of Scotland.

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