An empty GM factory
An empty GM factory Reuters

Proposals to reduce the US budget deficit would result in millions of job losses and less deficit reduction, delaying economic recovery for years, according to a report published on Tuesday.

“Deficit panel’s preliminary plan for reducing the budget deficit last week provides strong evidence that the commission has run severely off track,” said a report by the Economic Policy Institute (EPI).

The National Commission on Fiscal Responsibility and Reform last week came out with proposals seeking $4 trillion in deficit reduction from 2012 to 2020. The trimming will be through cutting discretionary spending and eliminating tax breaks, while also raising the social security retirement age and imposing other changes on entitlement benefits.

Notable parts of the discretionary spending cuts include temporarily freezing federal salary, cutting the federal full-time work force, reducing the number of federal contractors, reducing overhead costs within the Department of Defense, reducing defense procurement spending, reducing military personnel stationed at overseas bases, slowing the growth of foreign aid, and eliminating all earmarks.

The commission proposes the spending cuts to start gradually in 2012 in order not to disturb the fragile economic recovery.

But the policy institute believes that prematurely enacting sizeable austerity measures increases the possibility of the economy slipping back into outright recession, threatening to increase already unacceptably high level of unemployment.

Proposals would reduce roughly 723,000 jobs in 2012, 1.4 million jobs in 2013, and 1.9 million jobs in 2014, according to the report. Cumulatively, there will be 4 million job losses over the three fiscal years.The institute assumes 1 percent increase in GDP increases payroll employment by 1 million jobs.

“One of the guiding principles of the Co-Chairs’ plan reads “Don’t Disrupt a Fragile Economic Recovery,” but the details make clear that this is nothing but lip service to the persistent economic challenges this country will face for years,” the institute noted.

Further, EPI said lowered economic activity from the commission proposals would by itself increase the budget deficit.

“Ironically, this hasty embrace of austerity does not just harm the overall economy (bad enough in itself); it also means that their plan would produce far less budgetary savings than they assume, as the cyclical effects of depressed economic activity on the budget will largely defray the savings from spending cuts and tax increases,” the institute said.

Under the panel’s proposal, in 2020, the budget deficit is projected to be to just $382 billion, or 1.6 percent of the projected 2020 GDP. By 2037, the budget would be balanced and then turned into surpluses in subsequent years.

Finally, the institute says that “a better path to fiscal responsibility would be investing in job creation and growth to broaden the revenue base in the near-term, raising revenue from new sources over the medium-term to stem the hemmoraging caused by the Bush-era tax cuts for the very well-off, and reforming health care provision to generate long-run budgetary savings.”

However, a co-chairman of the presidential deficit commission said on Monday that he is hopeful commission members will approve recommendations to slash the U.S. budget deficit and send them to Congress.