World's economies need US budget compromise

PUBLISHED : Monday, 04 March, 2013, 12:00am
UPDATED : Monday, 04 March, 2013, 3:27am

Not that long ago, a US president and party leaders in Washington would have negotiated a deal to solve a budget crisis. That was before party political sentiment became so polarised. There are no longer enough moderates in congress to pass such a compromise. So there was no last-minute deal between President Barack Obama and Republican leaders to reverse automatic budget cuts agreed to resolve a previous crisis in a long-running battle over US fiscal policy.

As a result, barring a breakthrough like "grand bargains" of the past, Washington will implement US$85 billion in spending cuts by September - about half of them in defence and the rest across government agencies - and US$1.2 trillion in cuts over the next 10 years. Economists say this could trim US growth by more than 0.5 per cent this year - after only 0.1 per cent growth in the December quarter - which is not good news for the rest of the world. Ironically, there is a bittersweet note to it, with good news on US manufacturing and consumer spending, which are key to global recovery.

The index of US manufacturing purchasing managers rose from 53.1 to 54.2 in January, well above the cut-off line for expansion of 50, and consumer spending ticked up despite higher payroll taxes. This shows the US has some momentum in which to absorb spending cuts. By contrast, early PMI data for China last month indicated that manufacturing activity retreated to its slowest pace of growth - just above 50 - in four months, reflecting a fragile recovery. Euro zone and British PMI were both in negative territory at 47.9.

This focuses attention on the next US deadline of March 27 for renewing government funding and avoiding a partial shutdown on top of the spending cuts. This will be followed during the summer by negotiations to lift the country's debt ceiling. We trust that the president is right to believe common sense will prevail. For the sake of the world economy, Obama and congress should lay antipathy aside and strive to put both issues to bed in a modern version of a grand bargain.