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Where Government Spending Cuts Will Hurt the Most

Rick Newman

There's a paradox about government spending. A lot of taxpayers think there's too much of it, but when it comes to cutting specific programs, they want to leave everything the way it is. It turns out that we like what our government buys more than we realize.

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The big spending cuts due to kick in at the start of 2013 present the same conundrum. Under the Budget Control Act signed into law in the summer of 2011, Congress is supposed to start cutting about $110 billion per year in spending, with half coming from defense and half coming from other programs.

It sounds reasonable. The cuts represent less than 3 percent of all government spending, and we have to start somewhere if we're going to begin paying down a national debt that now tops $16 trillion.

But once the axe hits specific programs, the cuts seem scarier. The Obama administration, no doubt, was well aware of that when it drafted a recent report detailing where, exactly, that $110 billion is going to come from every year. The Budget Control Act stipulated that some programs would be exempt from cuts, including Social Security, Medicaid, food stamps, veterans' benefits, and a few other things. Taking those off the table means the remaining programs will need to be cut by proportions generally ranging from 7.6 percent to 9.4 percent.

Cuts of that magnitude would be painful. In its report, the White House argued that such cuts "would be deeply destructive to national security, domestic investments, and core government functions." Instead of immediate, across-the-board spending cuts, President Obama would prefer to address the problem with a mix of smaller spending cuts, higher taxes on the wealthy, and other reforms that include a higher eligibility age for Medicare and Social Security.

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The scheduled cuts are now law, and they'll go into effect unless Congress changes the law. I scoured the White House report to get a feel for where the money will come from: At least 37 federal programs will lose $500 million or more, which will account for about $81 billion of cuts. The other $29 billion will come from an array of smaller programs. Here's where some of the biggest cuts will occur:

Operations and maintenance for the Army, Navy, Air Force, Marines and National Guard: $20.4 billion in cuts

Military procurement: $11.5 billion

Medicare: $10.6 billion. (The new law limits cuts in Medicare to 2 percent of total spending.)

Military research: $6.5 billion

Defense health programs: $3.3 billion

National Institutes of Health: $2.5 billion

Special ed and education funding for the disadvantaged: $2.3 billion

Rent subsidies for low-income tenants: $1.5 billion

Afghan security forces funding: $1.4 billion

Federal unemployment insurance: $1.4 billion

Diplomatic and consular funding: $1.1 billion

NASA: $1.1 billion

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These are just the cuts that will exceed $1 billion per year or so. Many smaller programs could suffer more, since they have less money to work with overall. And remember, these cuts are scheduled to be enacted every year through 2021.

Though the numbers may sound large, the economy can probably handle such cuts. There might be layoffs at defense contractors and some government agencies, along with lower spending by people getting smaller government subsidies. Still, the cuts represent less than 1 percent of the nation's total economic output. On their own, the scheduled cuts would slow the economy, but probably not induce a recession.

The problem is, they wouldn't cut the national debt by all that much, either. The Budget Control Act cuts amount to just $1.2 trillion over nine years (the numbers don't add up precisely because part of the savings includes interest expenses that won't have to be paid). If enacted all at once, those nine years of cuts would lower today's debt by just 7.5 percent. For all the pain that scheduled cuts would cause, a lot more is coming.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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