In the United States federal budget, the sequester or sequestration refers to across the board reductions to the planned increases in federal spending that have begun to take effect on March 1, 2013. The cuts were enacted by the Budget Control Act of 2011 and initially set to go into effect on January 1, but that date was moved to March 1 by the American Taxpayer Relief Act of 2012, enacted on January 2, 2013. Cuts of approximately $85.4 billion during fiscal year 2013 began to take effect on March 1, 2013. The Congressional Budget Office estimated that the sequester would reduce 2013 economic growth by about 0.6 percentage points (from 2.0% to 1.4%) and affect the creation or retention of about 750,000 jobs by year-end.
The cuts are split evenly (by dollar amounts) between the defense and non-defense categories. Some major programs like Social Security, Medicaid, federal pay (including military pay and pensions) and veterans' benefits are exempt. Medicare spending will be reduced by 2% per year versus the planned levels.
Over the 2013--2021 period, the sequester would reduce planned spending by $1.0 trillion with interest savings of approximately $170 billion, for a total of nearly $1.2 trillion in debt reduction or avoidance. The blunt nature of the cuts has been criticized, with some favoring more tailored cuts and others arguing for postponement while the economy improves.
CBO reported in February 2012 that: "In the absence of sequestration, CBO estimates, GDP growth would be about 0.6 percentage points faster during [the 2013] calendar year, and the equivalent of about 750,000 more full-time jobs would be created or retained by the fourth quarter." "CBO projects that sequestration will reduce the deficit by $42 billion in fiscal year 2013 and that this year's sequestration and automatic spending reductions next year will reduce the deficit by $89 billion in fiscal year 2014." [R]educing the amount of fiscal tightening this year [2013] would strengthen the economy in the short term, [but] the resulting increase in federal borrowing would weaken the economy in the longer term unless other changes in spending or tax policy were made to offset that additional borrowing."[2]
CBO explained further why it expects the sequestration to reduce outlays by $42 billion in fiscal year 2013, although the the automatic budget cuts total $85 billion: "The $85 billion represents the reduction in budgetary resources available to government agencies this year as a result of the sequestration. But not all of that money would have been spent in this fiscal year in the absence of the sequestration: Some would have been used to enter into contracts to buy goods or services to be provided and paid for next year or in subsequent years. Acquiring major weapons systems and completing large construction projects, for example, can take several years. The $42 billion figure is CBO's estimate of the reduction in cash disbursements in fiscal year 2013; much of the remaining outlay reductions from the 2013 sequestration will occur in fiscal year 2014, though some will occur later."[2]
Economist Paul Krugman reported one estimate that implementation of the sequester could cost 700,000 jobs.[11][12] The International Monetary Fund plans to lower its 2013 GDP growth forecast for the U.S. from 2.0% to 1.5% if the sequester is implemented.[13]
Federal Reserve Chair Ben Bernanke testified in February 2013 that the Federal government should replace the sequester with smaller cuts today and larger cuts in the future, due to concerns the sequester would slow the economy.[14] He reminded lawmakers of the CBO's guidance that recent austerity measures were projected to reduce economic growth by up to 1.5 percentage points in 2013 (relative to what it would have been otherwise), of which 0.6 percentage points related to the sequester. Bernanke stated that the long-run fiscal issues mainly related to an aging population and healthcare costs. He wrote: "To address both the near- and longer-term [fiscal] issues, the Congress and the Administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run. Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget."[15]
Bernanke also explained that although current laws would stabilize the debt to GDP ratio at around 75%, the ratio averaged less than 40% from 1960 to the onset of the crisis in 2008: "This relatively low level of debt provided the nation much-needed flexibility to meet the economic challenges of the past few years. Replenishing this fiscal capacity will give future Congresses and Administrations greater scope to deal with unforeseen events."
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2013 Sequestration: Cuts to the U.S. Federal Budget and U.S. Government Finance | |
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