Can we live with the budget 'sequester'? Yes, but it’s better if we don’t.
Congress has many incentives to prevent the $100 billion 'sequester', the feared 'fiscal cliff' among them. But it’s main drawback is that it’s a blunt tool for a delicate budgetary task.
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Romney calls for an immediate 5 percent cut in discretionary nondefense spending – a budget move that could be called sequester lite. And within four years, he wants to bring federal spending down to 20 percent of the nation's gross domestic product – and then to keep it capped at that level.Skip to next paragraph
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Obama, by contrast, would leave federal spending above 22 percent of GDP, and doesn't call for any cap.
With the Senate likely to remain a battleground that is firmly in the control of neither party, the presidential election appears unlikely to give either party a firm mandate on fiscal policy. But the election could serve as a referendum about which candidate's vision voters prefer to give greater influence to, when the bargaining gets going in earnest.
Cuts would be 'across the board'
Back to the cuts: The 2011 law calls for cuts equaling about $100 billion a year, centered mostly in the discretionary portion of the federal budget. This means that some of the programs most important to Americans from day to day – Social Security, Medicaid, food stamps, and more – would not be affected. Medicare, another broad-reaching program, could see spending cuts of 2 percent under the law.
Beyond that, the cuts would essentially be "across the board," which would translate into a roughly 8 percent cut in each nondefense discretionary program next year, including air-traffic control and food-safety inspections. Military programs would face 9 percent cuts.
So there would be $100 billion in cuts each year, but compared with what benchmark of future spending? That money would be subtracted from a "baseline" that assumes federal spending grows at the rate of inflation each year.
These cuts, by themselves, aren't the kind of thing that would normally throw the economy into recession. The economy is growing at a current pace of about 2 percent a year, and $100 billion represents 0.6 percent of a year's GDP.
Still, the problem at this particular time is that the sequester is just part of a larger "fiscal cliff," which includes scheduled tax hikes next year as well. Taken together, the impact would be enough to cause a new recession unless Congress acts to reduce the cliff, forecasters say.
That's why economists generally expect Congress to take action – whether it comes late this year or as a retroactive maneuver, reducing the spending cuts and tax hikes early in the new year, after they have already started to take effect. The longer policymakers wait, however, the more the cliff's feared or real impacts could pinch economic growth.
An impact on lives
Beyond the impact on the wider economy, the spending cuts have other significant implications. One is on Americans' daily lives.
Mr. Penner, the former CBO chief, says he doesn't think the effects on domestic life would be severe. "There might be some inconvenience," he says, such as waiting longer for a passport. "It's not like closing the government, as we have done sometimes." (But stay tuned. "Government shutdown" is a whole separate problem that could recur some time next year, if political gridlock prevails.)