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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.

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5 Comments sorted by

  1. Michael Shand

    Software Tester

    How out of touch are you? the US defence budget is almost as big as all other countries combined and has steadily increased every year Obama has been in

    Defence is nearly half the budget and you identify the REAL problem as entitlement spending - there is a reason they call it entitlement spending - its because people are entitled to it, they paid into social security there whole lifes and now when they come to collect you say that they cant afford it

    But 50 military bases in Germany is a must right?

    Pathetic analysis

    1. Luke Freedman

      US Election Analyst at University of Sydney

      In reply to Michael Shand

      Quote from the piece

      "And the sequester’s defence cuts – albeit poorly designed – are long overdue."

      We're in complete agreement that the US spends far too much on its military so I have no idea why you say that I'm defending the current defence budget. Your claim that the country spends half its budget on the military however is not correct.

      In any case, as David Leonhardt explains in Here's the Deal (I highly recommend it as a fair minded looking at the US' budget challenges) in order…

      Read more
    2. Michael Shand

      Software Tester

      In reply to Luke Freedman

      So did the republicans borrow 2.7 Trillion from Medicare to pay for the Bush Tax Cuts or not?

      and now we are focusing on how much Medicare is costing?

      It happens every 10-12 years or so, the government will dip into entitlement funds to pay for other expenditure and then claim Medicare is sending the country bankrupt

      The framing of these pieces and focusing on individuals entitlements and ignoring oil subsidies, defence contractors, bailing out of wall st, tax cuts for the wealthy - All of this the US can afford and will keep finding ways to afford it BUT Medicare or foodstamps - God damnit sending the country bankrupt right?

      Why? because they dont represent the people, they represent big business interests and they know the poor cant defend themselves

      Again, cant afford medicare - alright but how the hell can they afford all that defense spending - its the framing I have a problem with

  2. Derek McKinnon


    I'm sorry, you lost me at "$580 billion dollars in savings by limiting deductions for high income earners".

    I accept the fact I have to put up with Wayne Swan lying and calling tax increases "savings".

    But when a supposed academic starts doing the same??????

    1. Luke Freedman

      US Election Analyst at University of Sydney

      In reply to Derek McKinnon

      Eh, in the previous paragraph I used the phrase "revenue increases" and then lower down used the much less generous term "tax hikes." Don't think there was anything misleading about it.

      Also, a little food for thought. Limiting deductions is probably more fairly described as a spending cut instead of a tax increase. Giving people tax breaks to buy a home or donate money to charity or purchase health insurance is a form of government spending.