Sequestration, Its Causes and Impact

Why Congress Used Sequestration and What It Did to the Economy

Sequestration
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The term sequestration comes from the Latin word sequestrare, which essentially means taking something away and locking it up for safekeeping. For example, when the ancient Romans couldn't agree who owned a piece of property, they gave it to a third party. He was called the sequester. He held onto the property until the two sides resolved their differences.

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. When they couldn't agree, the sequester kicked in. It cut spending by 10 percent from 2013 to 2021.

The sequester cuts federal spending by $1.1 trillion over 10 years. It accomplishes this in two ways. First, it cuts $109.6 billion from each fiscal year's budget, taking an equal amount each from both the mandatory budget and the discretionary budget.

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 must be appropriated to meet the expenses of these programs. It takes another Act of Congress to change them.

The discretionary budget includes every other federal government agency. Half of it involves military spending. Congress appropriates these funds each year. In 2018, Congress repealed sequestration for the military budget for Fiscal Years 2019 and FY 2020.

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

The FY 2013 Sequester

The spending cap for FY 2013 was $988 trillion, $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. The sequester cut these four main areas:

  1. Military spending: $42.7 billion or 7.5 percent.
  2. Medicare: $11.1 billion from a 2 percent cut in payments to providers. In other words, they get reimbursed 98 percent of their submitted bills.
  3. Other Mandatory programs: $5.4 billion or 8 percent.
  4. Other non-defense discretionary programs: $26.1 billion, a 5.1 percent cut.

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. This series of tax increases would have subtracted $607 billion gross domestic product.

The fiscal cliff of 2013 would have drastically increased the percentage of five types of taxes. It would also have greatly reduced government spending. This, in turn, would have hurt 2 million job seekers, reduced Medicare payments to doctors, and affected many other sectors of the economy.

The FY 2014 Sequester

The spending cap for FY 2014 was $967 billion. 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. Here's the breakdown:

  • Military spending - $54.6 billion or 9.9 percent.
  • Medicare - $11.6 billion or 2 percent.
  • Other Mandatory programs - $6 billion or 7.3 percent.
  • Other non-defense discretionary programs - $37 billion or 7.3 percent.

This second round of sequestration cuts started on January 15, 2014. The FY 2013 spending levels remained in place, giving the Conference Committee time to agree on a budget to avoid the next round of sequestration.

Post-Sequestration Goals

The goal of the sequestration process is to reduce spending by $1.5 trillion over the next decade. To reach this goal, an additional $109.5 billion must be cut each year through FY 2021.

What Caused Sequestration

Why would Congress do such a potentially destructive thing when Congress itself sets the federal budget? Why didn't it just create a budget that stayed below the debt ceiling?

The budget planning process wasn't used because tea party Republicans wanted to reduce spending on mandatory programs like Medicare, Social Security, and Obamacare. These programs need an Act of Congress to change spending. Republicans know they can't get the Senate to agree without using these extraordinary measures.

The situation began In August 2011, when Democrats and Republicans could not agree on the best way to reduce the budget deficit. Democrats refused to extend the Bush tax cuts for families making $250,000 or more, saying that the wealthy could best afford the higher tax rates needed to bring in more revenue.

They also leaned toward cuts in defense and away from mandatory programs like Social Security, Medicaid, and Medicare. Republicans, on the other hand, argued that high-end tax increases would slow job creation among small businesses. They said that the mandatory entitlement programs fostered a nation of dependency.

The resulting stalemate became a 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. They also raised the debt ceiling by $2.3 trillion. But, the super committee failed to come up with a plan by the November 23, 2011, 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.

How the Effects Flow Through Society

In the short term, sequestration probably slowed economic growth. But, the slowdown was not as much as initially feared because government spending is a major component of the GDP. Businesses that rely on government contracts though lost some business. Budgets for state aids, highway construction, and the FBI were also reduced.

Unemployment didn't fall as far as it would have since federal agencies couldn't hire many new workers. Reduction in payments to doctors meant that some dropped Medicare, resulting in fewer choices for patients.

Spending cuts continue each year through 2021, with an 8.9 percent cut in defense spending for 2018 and an 8.7 percent cut planned for 2019. Non-defense categories, which include Medicare, student loans, farm programs, and several other government programs, have also been affected by cuts. In 2018, Medicare spending was cut by 2 percent. Other programs received cuts totaling a 6.2 percent reduction.