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David Dykes, Greenville News

It has become more likely that the sweeping set of automatic federal spending cuts known inside the D.C. Beltway as "budget sequestration" will take place March 1, and southern states such as South Carolina could be among the hardest hit, economists said Monday.

The Palmetto State is among the top 10 states with exposure to non-defense cuts, since federal spending amounts to 7.4 percent of the state's gross domestic product, according to Wells Fargo Securities economists Mark Vitner and Michael A. Brown.

That makes South Carolina among the most susceptible to non-defense spending cuts, the economists said in an analysis.

Brown told GreenvilleOnline.com that the cuts could affect wages and salaries of federal civilian workers, leading to a private-sector impact of reduced retail sales related to loss of income of the workers who are furloughed or laid off.

The cuts also could affect companies with federal procurement contracts used by the government to buy or lease goods and services, Brown said.

But perhaps most worrisome for South Carolina is that it has one of the lowest per-capita incomes in the nation and relies heavily on government-transfer payments for health and welfare programs, he said.

"When you start talking about reducing aid to a lot of these programs, the ripple effect ... can be quite devastating for some of those lower-income states," Brown said.

Many programs might be spared from cuts, but the accessibility to those programs and such things as federal grants to local school districts could be affected, Brown said.

While the impact of budget sequestration could be severe, there is reason to believe some of the cuts might be partially reversed in the months ahead, Vitner and Brown said.

Sequestration is the term used for mandatory $1.2 trillion in across-the-board budget cuts over 10 years that were part of a 2011 deal to raise the debt ceiling.

The cuts were put in place to force Congress to address the nation's deficit problems by the end of 2012, but instead were met with a two-month delay that ends March 1.

A proposal from U.S. Sen. Lindsey Graham, a South Carolina Republican, and Sens. John McCain, R-Ariz., Kelly Ayotte, R-N.H., and James Inhofe, R-Okla., has attempted to forestall mandated defense cuts at a time when, they said, the country cannot afford them.

A proposal by Graham would avoid the first $85 billion of the $1.2 trillion by replacing the defense cuts with savings achieved by shrinking the federal workforce through attrition and freezing congressional salaries.

President Barack Obama's proposal has included some undefined cuts and tax reform that will generate more revenue.

But both proposals would set up another showdown during budget negotiations later this year. Neither of the two proposals mentioned the two largest entitlement programs - Medicare and Social Security.

Vitner and Brown said so-called "sequesterable" items as defined by the Budget Control Act consist of across-the-board mandatory and discretionary defense and non-defense items, including a 2 percent reduction in Medicare benefits.

Excluded from the sequestration process are Social Security, Medicaid and veterans' benefits, the economists said.

In their report, Vitner and Brown said that given the partisan gridlock over the past year, "It is unlikely that a prompt solution to avoiding the impending sequestration process will transpire quickly."

"Our expectation is that Congress will allow the sequestration process to begin, while it completes work on a continuing resolution for the remainder of the fiscal year," the economists said.

While a government shutdown likely will be avoided, the debate over taxes and spending policy will continue, Vitner and Brown said.

"It is likely that a deal will be reached to offset some spending cuts with tax increases or closing loopholes but, in general, we do not expect the magnitude of spending cuts to be significantly reduced," the economists said.

One possible option is to spread the budget cuts over a longer period of time, which would still allow for longer-term deficit reduction but at a more gradual pace, they said.

"Regardless of the political outcome, we still expect some moderate impact on state economies from the pullback in government spending in the short term, as agencies hold off on major spending commitments and put hiring on hold," Vitner and Brown said.

"The magnitude of the impact will be left to policymakers."

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