Just when you thought the phrase "fiscal cliff" had finally been banished from polite conversation, along comes an even more obscure but equally repetitive word: "sequestration." Now after 18 months of waiting, the hour is at hand and the beast is upon us. So what is it, and what is the likely effect?
Sequestration was originally a legal term meaning "seizure" or "impoundment," typically until a debt was repaid. The term entered the popular lexicon in 1985 with the Gramm-Rudman-Hollings Deficit Reduction Act, the last serious attempt to reign in federal budget deficits. The idea was to create an odious series of mandatory spending cuts (the sequester) that would
motivate Congress and the White House to agree on equally substantial but less indiscriminate fiscal restraint.
Sound familiar? In fact, Gramm-Rudman was the pattern for the presently looming regime of blunt pro-rata spending cuts. Recall that back in August of 2011, Congress and the president reached a deal to raise the government debt limit, subject to a pledge to reduce the growth of the national debt over the next ten years. To seal the deal, the White House proposed sequestration of $1.2 billion from federal spending over ten years as an enforcement mechanism to goad the negotiators toward an agreement. The fiscal cliff deal delayed sequestration by two months. As of Friday, the sand will have run out.
Time to panic? Hardly. The oft reported total of budget cuts for the remainder of 2013 is $85 billion, divided equally between defense and domestic discretionary spending. Medicare, Medicaid, and Social Security benefits are off limits. However, the $85 billion figure is technically budget authority; that is, authorization to enter into spending commitments that may span several years. The Congressional Budget Office estimates the actual cut in real spending for 2013 at $44 billion, basically half the amount that has been trumpeted, and roughly 1.25 percent of total spending for the year. To put that in perspective, the payroll tax cut last year cost the government around $90 billion, and the president just signed a $60 billion off-budget storm relief bill to aid victims of hurricane Sandy.
Furthermore, only in Washington is a smaller increase considered a cut. The mandatory spending reductions merely slow down the relentless increase in government expenditures. In fact, if the sequester were allowed to remain in force for the entire ten year period, federal spending would still increase by $110 billion. Not exactly catastrophic.
To be sure, some agencies will experience material reductions and thereby need to reduce services. The fundamental problem with the sequestration approach is the lack of flexibility to reallocate funds to cover the most essential services. The obvious solution is for Congress and the president to enact legislation granting more discretion over how to implement the cuts. So far, this has been a non-starter, but may gain traction as the impact becomes more manifest.
Meanwhile, consider this: if a family couldn't survive a 1.25 percent cut in spending, it's probably already bankrupt.
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Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at email@example.com.