Home Foreign US growth fears as across-the-board budget cuts hit public investment

US growth fears as across-the-board budget cuts hit public investment



Public investment in the US has hit its lowest level since demobilisation after the second world war, largely as a result of Republican success in stymieing President  Barack Obama’s  push for more spending on infrastructure, science and education.

Gross capital investment by the public sector has dropped to just 3.6 per cent of US output compared with a postwar average of 5 per cent, according to figures compiled by the Financial Times, as austerity bites in the world’s largest economy.

The figures underline how across-the-board budget cuts are threatening future growth, as the axe falls heavily on federal investments that boost output, rather than transfers such as pensions and healthcare for the elderly.

“This is the motivation for the president’s desire to significantly increase public investment,” said  Jason Furman , chairman of Mr Obama’s council of economic advisers and a close aide since the days of his 2008 presidential campaign.

“New authority for federal investment in the 2012 fiscal year was  $475bn ; you look at our proposal for 2014 and it’s  $624.8bn . We are proposing a very large increase and that’s because the country is not investing enough in its infrastructure and it’s not investing enough in R&D.”

The figures come as Republicans and Democrats begin new budget talks on tax and spending plans for the rest of 2014 after a short-term deal expires in mid-January. Democrats will push for relief from the across-the-board cuts, known as sequestration, but analysts expect a modest deal at best.

Public investment picked up at the start of Mr Obama’s term – temporarily rising to its highest level since the early 1990s – because of his fiscal stimulus. But that has been more than reversed by subsequent cuts. The biggest falls are in infrastructure, especially construction of schools and highways by states and municipalities.

Federal funding for research and development has only fallen modestly so far but will decline much further under any budget path that continues sequestration. That threatens a fundamental source of productivity growth for the global economy because so many ­scientific breakthroughs are funded by US bodies such as the  National Institutes of Health .

Some Republican economists argue that it makes no sense to cut public investments. “I am concerned about this because the discretionary parts of spending contain the core functions of government,” said  Douglas Holtz-Eakin , president of the  American Action Forum , a centre-right policy group, and former director of the  Congressional Budget Office .

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