Barring a last-minute deal between President Barack Obama and Republican Congressional leaders, it appears that the sequester — $85.3 billion in spending cuts for this fiscal year (and a total of $1.2 trillion in cuts over the next decade) — will be implemented beginning March 1.
What will the sequester mean? Let’s take a look.
Details of the cuts
$85.3 billion represents about 2.4% of total government spending. But the impacts of the sequester will be far more impactful than that, because of the programs that are exempted from the spending cuts. Additionally, five months of the federal fiscal year has already passed, meaning that the full year value of the cuts have to be taken in a seven-month timeframe.
Half of the spending cuts will come out defense. $42.7 billion represents 7.8 percent of the defense budget on an annual basis, but compressing those cuts into seven months will result in a 13% cut in defense spending the rest of the year. There are no significant exceptions to the defense spending cuts, meaning that essentially all items in the defense budget will get an across-the-board cut. This includes operations in Afghanistan and military aid for Hurricane Sandy relief. Additionally, President Obama has indicated he will protect soldiers from receiving pay cuts, which means all other programs will see yet larger cuts to make up the difference. Finally, restrictions in the sequester language mean that the Administration is prohibited from cutting the pay of civilian defense employees and must instead reduce headcount.
The other half of the spending comes out of three categories: domestic discretionary spending, domestic mandatory spending, and Medicare. Together, these categories make up the remaining $42.7 billion. Let’s talk about what is excluded from these three categories first — the list is long and includes Social Security, non-administrative expenses in the Veterans Administration, refundable tax credits (like the Earned Income Tax Credit), Children’s Health Insurance Program, standard unemployment benefits, Medicaid, and most other programs supporting low-income families. These programs represent over $2 trillion in annual government spending, meaning that all of the cuts are being taken against spending that represents about 40% of the federal budget.
Domestic discretionary spending cuts will total $26.4 billion, representing a 5.2% cut on an annual basis and an 8% cut over the next seven months. These cuts will hit areas of the budget including education funding for programs like Head Start, will require closing the air traffic control towers at several state airports, federal funding for “Meals on Wheels” programs, and grants for environmental projects.
Domestic mandatory spending will be cut by $5.1 billion, also representing a 5.2% cut on an annual basis and an 8% cut over the next seven months. These cuts will impact farm subsidies, extended unemployment benefits, and some federal health care programs, such as the Indian Health Care program.
Finally, Medicare will see $11.2 billion in cuts, representing a 2% cut. Medicare cuts will not impact beneficiaries of the program, but rather reflect a cut in provider and Medicare Advantage reimbursement rates.
What Will Happen?
The budget cuts in the sequester are really just about the worst kind of cuts that could be made. First off, they are arbitrary and across-the-board. The President has no discretion on how to distribute the cuts, meaning that effective programs are cut at the same rates as programs that have less impact. Second, there are too many exceptions. The cuts, as noted above, represent a small portion of the total budget, but since a majority of the budget is excluded from the cuts, the programs that are hit are hit hard.
These cuts are also going to have major negative impacts on employment and economic growth. The Bipartisan Policy Center projects a loss of 1 million jobs and 0.5% of gross domestic product. Other estimates claim job losses in excess of 700,000. Implementing the sequester is going to seriously damage a still fragile recovery and sluggish labor markets.
Worst of all, the combined effect of all of these impacts mean that we are unlikely to get any meaningful deficit reduction as a result of the sequester. Slower economic growth means that the economy will produce less tax revenue, making the deficit situation worse than before. As evidence of how this is possible, one need only look at what is occurring in Europe. Following rounds of budget cuts, the United Kingdom (which is on the verge of a triple-dip recession), France, and Spain have all missed their deficit reduction targets. Fed chairman Ben Bernanke warned of the same possibility before the House Financial Services Committee today.
Additionally, the fact that health care and entitlement programs are essentially left off the chopping block means that these cuts do practically nothing to change the long-term debt picture, because that is where the majority of spending (and spending growth) will happen over the coming decades.
The upshot here is that the failure of our political system to take the right path regarding our financial future has us on the verge of a serious self-inflicted blow to our economy. One might think that the risks here would be enough to get folks looking beyond their own narrow political interest. But apparently not. There’s a reasoned approach to be had here, maintaining levels of spending today to preserve the economic recovery while instituting reforms in the medium- to long-term in order to bring debt levels down to a sustainable level. Who’s going to set aside their party’s political interests to protect the jobs of hundreds of thousands of Americans?
Bipartisan Policy Center (explainer)
Washington Post (state-by-state impacts)