The Sequester

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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Obama who had critiqued the Iraq war as a dumb war at one time, after that war’s end is fighting a dumb 10-year war of economic recovery at home where passing the federal budget by September 30th is a miracle.

March 1 was the deadline for the United States Congress to arrive at a budget deal for the Fiscal Year (FY) 2012-2013 federal budget, ending on September 30th, 2013 if across the board spending cuts known as the sequester are to be avoided to prevent fiscal cliff effects from setting in.

Much has already been said about the sequester. Wikipedia has an excellent primer on Budget Sequestration and the major national newspapers have covered the subject extensively.

At the heart of sequester, however, is the number of dollars to be cut in spending: $1.2 trillion over the next 10 years from FY2013 to FY2022 or an average of 120 billion per year in less spending. If we assume a typical rise in federal spending of at least 120 billion per year, the sequester offsets the increase by exactly the same amount of decrease on a PAYGO basis: increases in some parts of the budget are offset by decreases elsewhere. This means by FY2022 effectively the federal budget will remain the same size as the FY2013 budget.

The sequester of $1.2 trillion over 10 years assumes that entitlement expenditures will not rise higher than $1.2 trillion. Without entitlement reforms this assumption is not valid.

Without the sequester, by FY2032, 20 years from now, the federal budget would be about $6 trillion or about 27% of US Gross Domestic Product (GDP), assuming entitlement reforms. Without these reforms and without the sequester it will be about $8 trillion or double the current size at 36% of GDP. National debt will continue to increase at the rate of $1.2 trillion per year over the same 20 year period, adding 24 trillion to the existing 16 trillion for a total of $40 trillion or about 180% of GDP in FY2032.

In an email The White House says “[a]nd the reason we are here is because some members of Congress have made a choice to prioritize [the sequester] over closing tax loopholes for the wealthy. But there is still time for them to make a different choice and undo this manufactured crisis.”

President Obama has obviously has not communicated clearly which tax loopholes must be closed to avert the sequester though he has been arguing for it for several years. He can do so by March 27th, the deadline for government shutdown.

At issue is not which contractionary fiscal policy to use – spending cuts or higher taxes – but entitlement reforms, not raising taxes to avert the sequester, are the sine qua non.

The true mandatory expenditures are the pure public goods – national defense, foreign affairs, treasury and money supply, the regulation and supervision of markets, and the administration of justice. All other expenditures are discretionary.

President Obama has lost some political capital and credibility after signing the sequester into law. Without these it will be difficult to engage in fiscal consolidation and reform entitlements and taxes.

Why sequester when entitlements and taxes can be reformed and fiscal consolidation can revamp government?


About Chandrashekar (Chandra) Tamirisa
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