The fiscal cliff legislation passed in early January averted tax hikes on most Americans. However, it postponed decisions about automatic across-the-board budget reductions. These budget cuts, formally called sequestration, will be triggered if Congress approves spending levels that exceed certain caps set by the Budget Control Act of 2011 (the Act). If sequestration occurs, $1.2 trillion of spending cuts are required from 2013 through 2021, with approximately $100 billion of these cuts scheduled to take place immediately.
Can sequestration be avoided?
In a word, absolutely. Under the Act, if Congress enacts sufficient spending cuts to avoid the “caps,” the automatic reductions will not take place. Otherwise, it will require Congressional agreement to modify the Act or extend the deadlines that are currently defined in the Act.
What are the likely effects of reduced spending?
- At the federal level, sequestration will almost certainly result in fewer federal employees. This will, in turn, lead to reduced response times and potentially less oversight of key programs.
- According to the White House plan, Army operations and maintenance would lose $7 billion and the Navy more than $4 billion. Educational achievement and special education programs would be cut by $2.3 billion and Medicare payments to hospitals would decrease by $7.6 billion.
- Under the terms of the cuts, most military programs would have a 9.4 percent reduction; domestic programs would be cut 8.2 percent, Medicare reduced by 2 percent, and other social programs, excluding social security, would be cut by as much as 10 percent.
The trickle-down impact of these cuts could potentially send the country into another recession. As Lockheed Martin’s CEO said recently, “Until sequestration is permanently eliminated, there will be an overhang on our industry that stifles investment in plant, equipment, people, and future research and development essential to the future health of our industry.”
Stay tuned; this isn’t the last we’ll be hearing about sequestration.
David E. Shaffer is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
What is your take on sequestration? Will it happen? What will be the impact? Share in the comments.