Spending cuts: five reasons allowing sequestration is bad policy

In two weeks, about $1 trillion in automatic spending cuts will begin to kick in, a testament to the inability of policymakers to reach a grand fiscal bargain. Allowing these cuts to happen would be terrible policy.

Here’s the background: In August 2011, Congress passed the Budget Control Act (BCA) as a last-minute solution to an impending debt ceiling crisis. BCA averted fiscal and financial disaster by allowing additional Treasury borrowing authority, but also put in place deficit-reduction measures that would cut the deficit by $2.1 trillion over 10 years.

These measures included caps on discretionary spending—cutting outlays by over $900 billion over the decade—and a requirement that Congress achieve an additional $1.2 trillion in deficit reduction. BCA stipulated that if Congress failed to cut the deficit by this amount (and it did), deficit reduction would be automatically achieved by “sequestration”—formulaic cuts in federal spending.

The cuts were originally due to begin on January 2, but fiscal cliff legislation pushed off the official commencement until March 1. On that date, the Office of Management and Budget will implement $85 billion in cuts for the remainder of the 2013 fiscal year—this translates into cuts of about 9 percent for affected non-defense discretionary programs and 16 percent for defense. If no action is taken, sequestration will reduce spending by $109 billion per year for the subsequent eight years. In all, cuts will total $960 billion, with an additional $216 billion in saving coming from lower interest payments. 

Allowing sequestration to occur is a mistake. Here are five reasons why:

1. It was never intended to take effect. Sequestration was designed to be so unpalatable that Congress would have to devise a better plan. Deep, immediate cuts in defense spending were intended to bring Republicans to the table while broad reductions in domestic programs were meant to push Democrats to compromise. Combined, these cuts were regarded as so severe that they would eventually force a grand bargain.
2. It will hurt the economy. In its recently released Budget and Economic Outlook, the Congressional Budget Office (CBO) noted that the scheduled cuts in federal spending were a primary driver of the slow economic growth projected for this year.  Cutting billions of dollars in federal spending in the middle of a tepid recovery is a mistake. Thousands of public-sector jobs will be lost; federal contractors will cut even more. (The Bipartisan Policy Center estimates that the sequester will cost one million jobs.) One of thelessons from the Great Depression is not to cut spending in the midst of a recovery. Let’s not repeat the error.
3. The sequester slashes funding for discretionary programs to historic lows, but does not cut entitlements. Nearly all of the sequestered cuts come from discretionary programs that fund government operations. Even without the sequester, the caps imposed by the BCA will limit discretionary spending. Sequestration will drive down discretionary spending even further—to 5.5 percent of GDP by 2023—the lowest level in our nation’s modern economic history. Yet mandatory programs, accounting for $29 trillion in spending over the next decade, will be largely immune from cuts.
4. The cuts are destructive and unfair.  Arbitrary, formulaic cuts mean that federal budgeters have limited discretion in how the cuts are applied. Key public programs, such as Head Start, air traffic control, and law enforcement, will be cut; disaster relief for Hurricane Sandy will be cut as well.  Others will be forced to unfairly bear a disproportionate burden. Medicare providers, for example, are on the hook for $112 billion in cuts—one-quarter of the non-defense cuts. There are better ways to cut spending.
5. The federal government needs to offset the continuing contraction in state and local governments. If sequestration had been implemented in a typical recovery, it’s likely that state and local governments could pick up the slack. However, unlike in past recoveries, subnational governments have been laying off workers and contracting at an alarming pace. Sequestration, and near-term budget cuts more generally, will compound the problem.

Our country is in desperate need of a sensible framework for deficit reduction that includes future cuts to entitlement spending and new revenues from economically efficient tax reform. Arbitrary cuts aimed mostly at one relatively small piece of the budget are no substitute for a comprehensive deficit-reduction package.