The Budget Control Act of 2011 mandated $1.2 trillion in automatic spending cuts, known as the sequester, if Congress failed to negotiate a more targeted deficit-reduction package. The blunt federal budget cuts — spread over nine years, 2013 to 2021, and divided evenly between defense and nondefense programs — were meant to be indiscriminate and painful as motivation for lawmakers to take action.¹
Because a deal to replace the cuts has yet to materialize, the sequester is moving forward. Federal agencies have received official orders to reduce their spending by a total of $85 billion from March 1 through September 30 (the end of fiscal year 2013).²
Here’s a closer look at the budget-cutting measures to be implemented across the federal government, and the potential effects they might eventually have on the broader U.S. economy.
What’s Under the Knife?
The sequester reduces the size and scale of existing federal programs without eliminating any of them. In fact, reduced funding must be applied evenly to every “program, project, and activity.”
Military salaries are not subject to the sequester. Most mandatory expenses — including Social Security and Medicare benefits and many safety-net programs for the poor (such as Medicaid and food stamps) — are also excluded.³
Here are some examples of the estimated FY 2013 amounts to be stripped from specific government programs.4–5
Defense (cut by 13%)
- $13.5 billion from military operations across the services
- $3.5 billion for cancelled or delayed aircraft purchases
- $6.3 billion from military research
Nondefense (cut by 9%)
- $1.6 billion from the National Institutes of Health
- $1.94 billion from public housing support
- $970 million from NASA
- $904 million from border security and immigration enforcement
- $840 million from special education
- $480 million from the Federal Bureau of Investigation
- $406 million from Head Start
- $323 million from airport security
- $323 million from the Centers for Disease Control and Prevention
Even though federal employees will not have their pay rates reduced, most of the 2.1 million federal employees will be forced to take unpaid days off (furloughs). Civilians working for the Defense Department may lose as many as 22 workdays over the next five months.6
Workers at nondefense agencies are expected to face fewer furlough days. The implementation of furloughs may depend on each agency’s function and negotiations between unions and agency leaders.7 Workers at the IRS, for example, may sit out only five to seven days, and their furloughs will not begin until the summer after the tax filing season passes.8
Nevertheless, the general public may experience longer wait times for government services and reduced hours at national parks, museums, and other facilities staffed by federal workers.
Possible Spillover Effects
Federal workers coping with smaller paychecks may spend less on goods and services. In addition, companies (big or small) that rely on government contracts could receive fewer orders and may need to lay off employees.
Some experts have projected that the sequester could trim 0.5% to 0.7% from real U.S. gross domestic product (GDP) growth for 2013.9 However, if GDP growth picks up speed, it could temper some of the impact.
The effects of the budget cuts could be felt differently around the nation. Some individuals may not notice any direct changes, whereas people and businesses in communities with a significant military or federal agency presence could suffer more. For instance, in the region that includes Virginia, Maryland, and Washington, D.C., federal spending accounts for about 20% of economic output.10
One criticism of the sequester is that it largely ignores longer-term deficit drivers such as Social Security and the rising cost of government health-care programs (Medicare and Medicaid). Thus, it’s still possible that a more comprehensive deficit-reduction strategy could emerge during future budget negotiations.11
1, 2, 4, 9) Office of Management and Budget, 2013
3, 5) The Washington Post, February 20, 2013
6, 7) CNNMoney, March 5, 2013
8) CNNMoney, February 28, 2013
10–11) The Wall Street Journal, February 28, 2013
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.