Sections

Services

Information

UK United Kingdom

No silver lining to US budget sequester

The first thing you should know about the sequester is that nearly everyone agrees that it’s a bad idea. In fact, that was the point. In the summer of 2011, with congressional Republicans refusing to raise…

The deadline for the US budget sequester —which will see across-the-board spending cuts of $US 85 billion implemented over the fiscal year — is rapidly approaching. AAP

The first thing you should know about the sequester is that nearly everyone agrees that it’s a bad idea. In fact, that was the point.

In the summer of 2011, with congressional Republicans refusing to raise the debt ceiling, the White House proposed an alternative to try and avoid a budget default. In exchange for increasing the country’s borrowing limit, the two sides lined up $1.2 trillion in across the board cuts, which were to go into effect at the beginning of 2013 unless Congress and the President could agree on a way to achieve equivalent savings. This sequestration would be spread out over the next decade with roughly $85 billion in cuts set to kick in during the first fiscal year.

The sequester is haphazard, to say the least. The cuts are evenly divided between defence and non-defence discretionary spending and apply equally to all federal agencies. This means there’s no way to prioritise more crucial programs or projects. The thinking was that because the cuts were so crude and far-reaching, there’d be real incentive for Democrats and Republicans to replace the sequester with something more palatable.

But that’s not how things have played out. First, there was a bipartisan supercommittee tasked with reaching a deal. That fell apart. Then the two sides agreed to delay the sequester until March 1 as part of the January fiscal cliff deal. And now we’re on the verge of blowing past that new deadline with no endpoint in sight.

President Obama and congressional Democrats want to replace the sequester with a combination of spending cuts and revenue increases.

Here’s a rough outline of the White House’s proposal: $580 billion dollars in savings by limiting deductions for high income earners; $400 billion in healthcare savings through cuts to Medicare provider payments; $200 billion dollars split between defence and non-defence discretionary spending; and $130 billion in Social Security cost-of-living adjustments (ie benefit cuts).

Republican leaders haven’t put forward a formal counter-proposal, but they have been clear on one point: no tax hikes. “Mr President, you got your tax increase [back in January]” House Speaker John Boehner declared on Monday. “Now it’s time to cut spending.”

Sensing an impasse, the White House has tried ratchet up to the pressure by releasing detailed state-by-state reports on the effects of the sequester. The findings aren’t pleasant. Roughly 70,000 kids could get kicked off Head Start, the early childhood education program for low-income families. Six hundred thousand women and children would no longer be eligible for nutrition support. Flights delays could increase dramatically and smaller airports' towers closed altogether.

What’s especially frustrating is that this self-inflicted pain serves little purpose. The trillion-dollar deficits of recent years have been driven primarily by one-off events stemming from the global financial crisis. In fact, discretionary spending is at its lowest level relative to GDP in over 50 years after President Obama and Congress agreed to $900 billion in cuts in 2011.

The sequester failed to touch the real catalyst of the country’s long-term debt: problem-entitlement spending. Rising healthcare costs and an ageing population are causing outlays for Medicare, Medicaid and Social Security to outpace their sources of revenue. The US is already bearing some of the consequences of these changes but the most dramatic problems won’t arise until the 2020s and 30s.

Addressing these challenges will require hard decisions on spending and taxes, but it also hinges on creating sustained and robust economic growth. The recent test cases from Europe confirmed what most economists could have predicted: austerity during an economic downturn is a recipe for disaster. Sure enough, estimates by the Office of Management and Budget and the Bipartisan Policy Center predict that the sequester would cost between 700,000 and 1,000,000 jobs by the end of 2014.

Further, discretionary spending on education, infrastructure, and research and development end up paying large dividends down the road. Just as it makes economic sense for a teenager to take out loans for university, so too can it be wise for the government to invest in programs that will increase the well-being and earning potential of its citizenry.

Certainly, some discretionary spending is wasteful and should be done away with. And the sequester’s defence cuts - albeit poorly designed - are long overdue. But the deficit reduction set to go into effect on March 1 fails to address most of the major budgetary issues while further squeezing some already underfunded programs and hampering the economic recovery.

The problem is that while the sequester is bad, it ironically doesn’t seem to have been bad enough to serve its purpose of forcing a deal. As such, the next in the seemingly endless series of deadlines to keep an eye on is March 27. This is the point by which Congress needs to pass a continuing resolution to fund the government through the next fiscal year. Both sides could try to use this as leverage with Republicans holding out for more cuts and Democrats demanding a more balanced replacement for the sequester. We’ll have to see if the threat of a government shutdown actually spurs some action.