New budget crisis begins with failed fiscal talks

The U.S. government stumbled headlong on Friday toward wide-ranging spending cuts that threaten to hinder the economic recovery, after President Barack Obama and congressional leaders failed to find an alternative budget plan. Put in place during a bout of deficit-reduction fever in 2011, the automatic cuts can only be halted by agreement between Congress and the White House.
 
A deal proved elusive in talks at the White House on Friday as expected, meaning that government agencies will now begin to hack a total of $85 billion from their budgets between Saturday and Oct. 1. Financial markets in New York shrugged off the stalemate in Washington.
 
Democrats predict the cuts, known as "sequestration," could soon cause air traffic delays, furloughs for hundreds of thousands of federal employees and disruption to education.
 
While the International Monetary Fund warned that the belt tightening could slow U.S. economic growth by at least 0.5 of a percentage point this year, that is not a huge drag on an economy that is picking up steam.
 
Obama was resigned to government budgets shrinking.
 
"Even with these cuts in place, folks all across this country will work hard to make sure that we keep the recovery going, but Washington sure isn't making it easy," he said after meeting Republican and Democratic congressional leaders.
 
At the heart of Washington's persistent fiscal crises is disagreement over how to slash the budget deficit and the $16 trillion national debt, bloated over the years by wars in Iraq and Afghanistan and government stimulus for the ailing economy.
 
Obama wants to close the fiscal gap with spending cuts and tax hikes, but Republicans don't want to concede again on taxes after doing so in negotiations over the "fiscal cliff" at the New Year.
 
"The discussion about revenue, in my view, is over. It's about taking on the spending problem," House of Representatives Speaker John Boehner said on leaving the meeting.
 
The full brunt of the automatic cuts will be borne over seven months. Congress can stop them at any time if the two parties agree on how to do so.
 
No matter how Obama and Congress resolve the 2013 battle, this round of automatic spending cuts is only one of a decade's worth of annual cuts totaling $1.2 trillion mandated by the sequestration law.
 
Given the current absence of a deal, Obama is required to issue an order to federal agencies by midnight to reduce their budgets. The White House budget office must send a report to Congress detailing the spending cuts.
 
The Justice Department has already sent notices of furloughs that will begin April 21 at the earliest to some 115,000 workers, including at the Federal Bureau of Investigation.
 
Unlike previous fiscal dramas, the sequestration fight is not rattling Wall Street.
 
U.S. stocks rose moderately on Friday, with the Dow Industrials closing up 35 points, as data showed manufacturing expanded at its fastest pace in 20 months in February. Despite being up more than 7 percent this year, and near a record high, the discord in Washington has not prompted traders to cash in gains.
 
"Most of us believe that sequestration is not something that will make us fall off the cliff, since the cuts will be worked in relatively slowly," said Bill Stone, chief investment strategist at PNC Wealth Management in Philadelphia.