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The Potential Impact of Sequestration

Sequestration is set to go in effect tomorrow (March 1) unless Congress and the President deem otherwise. If sequestration goes into effect as is, it is purported to result in across-the-board spending cuts of $1.2 Trillion over the next 10 years. 

You may have seen the charts circulating that show the potential impact of sequestration on certain state budgets:

In the next few paragraphs, we hope to make it clear how overblown the sequestration issue really is and how much these "cuts" do not really matter in the broader picture.

1) Almost No Real Cuts. For the most part, the sequestration "cuts" are not really cuts at all. Sequestration provides cuts primarily to the projected increases of future budgets rather than cuts to an actual fixed budget. In other words, sequestration would merely reduce the projected increases over the next 10 years, but the budgets would continue to grow year over year. 

2) The Only Real Cuts Are Insignificant. The only real cuts to a currently fixed budget would be the impact of sequestration in this fiscal year. There are estimates that cuts to this year's budget would be approximately $85 Billion. However, due to the delays in implementing sequestration, it looks like the actual impact would be limited to between $44 and $50 Billion. To put that in context, the federal budget grew by over $202 Billion from 2011 to 2013. So, if sequestration takes place, we are looking at a cut of less than one-fourth of the budget increases we have seen over just the past two years.

Moreover, the cuts to fiscal 2013 budget represent only 1-2% of the total 2013 budget! 

3) The Federal Budget Could Stand to Be Cut Significantly (which Sequestration does not do) without necessarily having a large impact on the economy.

Remember the days prior to the Great Recession when homes were ATMs, the interest rates on savings accounts were not insulting, we were heavily involved in two active middle east wars, everyone was flush with cash, and the federal budget was only $2.7 Trillion? Fast forward to today and we are current staring a fiscal budget of $3.8 Trillion in the face. After sequestration, that will be reduced perhaps to a $3.75 Trillion budget.

We are spending over $1 Trillion more per year than we were only six years ago with a greatly reduced presence in the middle east, with interest rates pinned near zero, and after pouring tremendous capital into the economy to soften the downturn of the Great Recession. 

We will have spent over $4.78 Trillion in excess funds over the 2007 budget levels from 2008-2013. Besides an exactly proportionate 40%+ increase in our national debt over the same period (in order to fund the excess), what has all of this additional funding bought us? What is so different today versus six years ago that justifies an extra $1 Trillion dollars in spending per year?

Due to the rapid growth in spending since 2007 and given the trajectory of the federal budget going forward, sequestration cuts represent essentially a reduction of less 10% of the projected growth of the budget over the next 10 years.  Put another way, instead of growing spending by another $12-14 Trillion over the next 10 years, we are really cutting back, tightening our belts, reigning in the excess, and only growing spending by $10.8 to 12.8 Trillion. Bring on Armageddon, right?

Bottom line: Other than shorter-term perception shifts and reactionary moves in the stock market and US Dollar, we expect sequestration will have little to no impact on the economy overall. That is not to say that the economy is necessarily healthy or immune from recession risks. But if the economy does indeed fall into recession in the next couple of years, it will not likely be due to any impact from  sequestration.

 

Written By: Joshua Ungerecht
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federal budget, federal spending, national debt, Sequestration, spending cuts