NFRW explains What You Need to Know About the Sequester

What You Need to Know About the Sequester: 

  • What is the sequester? The sequester was an idea brought forth by the Obama administration during debt ceiling talks involving the “super committee” of 2011. The sequester was the administration’s threat over the super committee to bring about budget cuts of 1.2 trillion dollars over 10 years. The sequester was supposed to be so distasteful to both Democrats and Republicans that it would serve as an impetus to achieve the administration’s desire for specific budget cuts. The super committee failed, and the sequester stayed.
  • When will it go into effect? It was originally supposed to take effect in January of 2013, but the fiscal cliff deal postponed the date until March 1, 2013.
  • What happens if it takes effect? If the sequester goes into effect on March 1, it will set off a series of automatic cuts to defense and entitlement programs that equal $965 billion over the next ten years. But what do “cuts” mean in this case? As Michael Tanner observes in National Review Online, “the sequester is a ‘cut’ to federal spending only in the Washington sense of ‘any reduction from baseline increases is a cut.’ In reality, even if the sequester goes through, the federal government will spend $2.14 trillion more in 2022 than it does today.” Further, “the sequester would reduce the growth in domestic discretionary spending by $309 billion over ten years. But annual spending on these programs will increase by $90 billion over that period.” In other words, even with the sequester “cuts,” we are going to spend more money on domestic programs in 2022 than we do today.
  • What is the budget baseline and how does it relate to the sequester?  The budget baseline is what the Congressional Budget Office determines federal revenues, outlays, surpluses, and deficits will be assuming future budgets will equal the current budget times the inflation rate times the population growth rate. The current budget baseline says that the government will spend $44.8 trillion between 2013 and 2022. The sequester will cut this number by $1.16 trillion, barely 2.6 percent of the what the government plans to spend until 2022.  
  • How much would it cut government spending this year? While the sequester cuts $965 billion over the next ten years, it would cut spending by $44 billion in 2013. The expected budget for 2013 is $3.97 trillion, so an $44 billion cut amounts to 1.2% of the budget. The federal government spends $44 billion in approximately 4.5 days.
  • Some Republicans are worried about the cuts to defense, what about those? Yes, the sequester will cut the budget for the Department of Defense, but in inflation-adjusted terms, the rate of spending will never go below 2007 levels. As Tanner points out, “By 2015 [defense spending] will rise again, surpassing 2012 levels, ($554 billion) by 2019 and reaching $589 billion by 2021….By comparison, the United States spent, in 2013 dollars, an average of just $435 billion per year on defense during the Cold War (1948-1990), when we faced a much greater conventional threat.” Further, the cuts to defense do not effect war spending, only base defense spending. Next year’s budget for the Defense Department is $552 billion, and the sequester will require a $55 billion cut from that budget, amounting to 10%. These cuts do not effect war spending. Defense Secretary Panetta has already ordered the first steps towards readying the Defense Department to deal with the cuts, by “freezing civilian hiring, delaying certain contract awards and curtailing nonessential facility maintenance.” Again, the sequester has not and will not impose drastic cuts to necessary defense spending.
  •  How will the cuts affect GDP? The Wall Street Journal estimates the cuts amount to 0.5% of GDP.
  • Besides some defense spending, what other programs are exempted from the sequester? Apart from war spending at the Department of Defense, other programs exempted from the sequester include Social Security, Medicaid, the children’s health insurance program, refundable tax credits, supplemental security income, the food stamp program, and veteran’s health benefits. Medicare, however, is not exempted, and will see a 2% cut in Medicare payments to insurance plans and doctors who accept Medicare.
  • Deeming the sequester “a pittance,” Senator Rand Paul (R-KY) pointed out that “even with the sequester, spending goes up $7 trillion or $8 trillion over the next ten years.” The sequester cuts are standing law, and the only cuts to spending that have been agreed to in this administration.

This analysis was compiled from the work of Michael Tanner for National Review Online (Don’t Fear the Sequester), Donna Cassata from the Associated Press (The nuts and bolts of the sequester), The Wall Street Journal (The Unscary Sequester, and Panetta Orders First Concrete Sequester Steps), and Susan Jones for (Sen. Rand Paul: The Sequester is a Pittance). Also, see the latest CBO report on the sequester here.