Effects of the Sequester

Brian Hicks

Updated March 8, 2013

Sequestration is something that not everyone is entirely familiar with, but those who have been keeping a close eye on Washington have likely heard their fair share of the concept over the course of the past week.

According to Bloomberg, automatic spending cuts went into effect on March 1st, half of which affect defense spending and the other half of which is spread throughout a number of federal agencies. Known as sequestration, these cuts are being made in order to help the government reach its goal of reducing the nation’s debt by $1.2 trillion over the course of the next nine years.

A great deal of these cuts will actually go into effect this year, as officials are striving to cut $85 billion in government spending in the final months of 2013.

The argument over whether or not budget cuts are actually good for the country can be taken in either direction. Those in favor of sequestration state that America simply has no choice but to get out of debt, and that government cuts can help to expedite the process in ways that would otherwise be next to impossible. With these cuts, however, comes a potentially major hit to economic growth.

In an estimate from the Congressional Budget Office, spending cuts are likely to reduce economic growth in America by 0.6% in 2013. While this may not seem as if it is a major hit to the economy, it’s important to realize that even a small reduction such as this can have a large impact on any economic state that is in recovery. So what does this mean for the common American?

To put things into perspective, it’s helpful to look at the negative growth percentage in terms of jobs. While 0.6% may seem like a small drop in the bucket, it equates to roughly 350,000 lost US jobs.

In a country where unemployment is already a problem that has made headlines for years now, the loss of this many jobs will likely have a greater effect than most people might realize when simply looking at sequestration at face value.

Many of the programs that will experience budget cuts through sequestration are defense-related, although this is not the case across the board. The FAA, for example, is expected to close nearly 100 air-traffic control towers as a result of the cuts.

These cuts come as a result of a standoff between Democrats and Republicans that has been going on for some time now over how to best approach fixing the nation’s deficit. Democrats, for example, have called for higher taxes on the wealthy, although Republicans have shot this down repeatedly, citing the tax hikes that already happened as a result of the fiscal cliff deal. If this had gone through, however, the increase in tax rates would have effectively replaced the need for major cuts in government spending.

It’s understandable to believe that budget cuts such as these could have a dramatic effect on the stock market, although it seems as if investors are not letting this setback affect them quite as much as one might think. Both the Dow and the S&P 500 have seen improvements, with neither experiencing any significant setbacks as a result of the cuts. 

It’s difficult to say exactly what’s next for the House and Senate in regards to budget cuts. Both Republicans and Democrats are actively working towards keeping the government in strong working order throughout the rest of the fiscal year. 

Voting has already begun on a bill introduced by House Republicans to keep spending cuts in place in the future and finance the U.S. government at a rate of $982 billion per year, which would cancel a 0.5% pay raise for government employees that is set to take effect this April.

The effect of these cuts would not likely be seen right from the start. Since funds that are approved in a given year are usually reserved for future spending, the hits would likely not show a noticeable impact until 2014 and beyond.

Needless to say, however, this sets the stage for a potentially rough hit to the economy in the latter half of the decade, which is just one reason why government officials have their sights set on finding the best possible solution to fixing the deficit.  

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