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Sunday, December 5, 2021

Sequestration, Its Causes and Impact

Why Congress Used Sequestration and What It Did to the Economy

The term sequestration comes from the Latin word sequestrare, which essentially means to set something aside for safekeeping. When the ancient Romans couldn’t agree who owned a piece of property, they gave it to a third party, called the sequester. He held onto it until the two sides resolved their differences.1

Congress initiated the process of sequestration with the 2011 Budget Control Act. Republicans and Democrats couldn’t agree on the best way to lower the deficit. They used the threat of sequester to force themselves to reach an agreement. But when they couldn’t agree, the sequester kicked in, cutting spending by 10% from 2013 to 2021.3

Mandatory programs are those established by Acts of Congress. They include non-defense categories such as Medicare, Social Security, and the Affordable Care Act.

Funds for mandatory spending are so-called because they must be appropriated to meet the expenses of these programs; they can’t be changed without another Act of Congress.

The discretionary budget includes every other federal government agency. Half of it involves military spending. Congress appropriates these funds each year. In 2019, Congress repealed sequestration for the military budget for Fiscal Years 2019 and FY 2020.5

Second, sequestration sets caps on spending. If the caps are exceeded, then the U.S. Treasury must withhold any funds above the cap limit.6 These caps are a fail-safe system.

An additional $109 billion must be cut each year through FY 2021.7

The FY 2013 Sequester

The spending cap for FY 2013 was $988 billion, $55 billion lower than the FY 2012 cap of $1.043 trillion. Congress enacted $85 billion in spending reductions to keep spending below the cap.4 The sequester cut these four main areas:

  • Military spending: $42.7 billion or 7.5%
  • Medicare: $11.1 billion from a 2% cut in payments to providers—in other words, they get reimbursed 98% of their submitted bills
  • Other mandatory programs: $5.4 billion or 8%
  • Other non-defense discretionary programs: $26.1 billion, a 5.1% cut8

These cuts began on March 1, 2013. Sequestration was originally supposed to occur January 1, but Congress moved the date to March as part of its deal to avoid the fiscal cliff, a series of tax increases that would have affected the deficit by $607 billion or 4% of the gross domestic product.9

The FY 2014 Sequester

The spending cap for FY 2014 was $967 billion.10 House Republicans wanted to maintain the cap but shift all of the cuts from military to other domestic programs. Democrats wanted to raise the cap to $1.06 trillion, end the sequester, and return to the normal budget process.

Congress then enacted $109.3 billion in cuts:

  • Military spending: $54.6 billion or 9.9%
  • Medicare: $11.6 billion or 2%
  • Other mandatory programs: $6 billion or 7.3%
  • Other non-defense discretionary programs: $37 billion or 7.3%7

What Caused Sequestration

Why didn’t Congress just create a budget that stayed below the debt ceiling?

In August 2011, Democrats and Republicans could not agree on the best way to reduce the budget deficit. The resulting stalemate became the budget crisis in 2011. Existing spending and tax cuts sent the nation’s debt toward the predetermined ceiling limit. The government cannot push the debt above the national debt ceiling.

To avoid a debt default, party leaders finally agreed to appoint a bipartisan super committee to come up with a solution.11 They also raised the debt ceiling by $2.3 trillion. But, the super committee failed to come up with a plan by deadline. It even ignored the reasonable recommendations of the Simpson-Bowles Report.

This failure triggered the sequestration cuts. It wasn’t until after the 2012 presidential election that the lame-duck Congress could refocus on the budget, in a last-minute attempt to avoid sequestration and the rest of the fiscal cliff. The cliff was avoided but sequestration was not.

Effects and Impact

In the short term, sequestration slowed economic growth, although how much isn’t clear. But, the slowdown was not as much as initially feared because government spending is a major component of the GDP. Unemployment increased and personal earnings decreased.12 Reduction in payments to doctors meant that some dropped Medicare, resulting in fewer choices for patients. Budgets for state aids, highway construction, and the FBI were also reduced.

Continuing Deficits

Spending cuts continue each year through 2021. Adjustments to the Budget Control Act have changed several times to increase the caps on defense or security spending. The cap in 2019 was set at $647 billion for defense spending and $597 for non-defense spending.13

Adjustments to defense spending include $69 billion for overseas contingency spending and $3 billion for emergency requirements.

A CBO analysis of President Trump’s 2020 budget projects deficits would total $9.9 trillion over the next 10 years; mandatory health spending would be reduced by $1.5 trillion and federal revenues would be reduced by $0.9 trillion.

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