Sequestration: Its Causes and Impact

Why Congress Used Sequestration and What It Did to the Economy

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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, who held onto it until the two sides resolved their differences.

When it comes to the federal budget, sequestration is the act of cutting spending by withdrawing funding for certain government programs. The Congressional Budget Office provides the estimates, and the Office of Management and Budget renders the ultimate decision on whether and how much to sequester.

How Budget Sequestration Works

Congress initiated the process of sequestration with the 2011 Budget Control Act. When 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 $900 billion over 10 years.

The sequester was designed to cut the federal deficit by $1.2 trillion over that same period. It aimed to accomplish this in two ways. First, it cut $109 billion from each fiscal year's budget beginning in 2013, taking an equal amount each from the mandatory budget and the discretionary budget.

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.

Second, sequestration set caps on spending. If the caps were exceeded, then the U.S. Treasury had to 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 $1.002 trillion, $60 billion lower than the FY 2012 cap of $1.062 trillion. The sequester cut these four main areas:

  • Military spending: $42.7 billion, or 7.9%
  • Medicare: $11.3 billion from a 2% cut in payments to providers
  • Other mandatory programs: $5.4 billion, or 5.1%
  • Other non-defense discretionary programs: $25.8 billion, a 5% 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, a series of tax increases that would have affected the deficit by $607 billion, or 3.7% of the gross domestic product.

The FY 2014 Sequester

The spending cap for FY 2014 was $1.120 trillion. 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, end the sequester, and return to the normal budget process.

Congress then enacted $109.3 billion in cuts:

  • Military spending: $54.7 billion, or 9.8%
  • Medicare: $11.2 billion, or 2%
  • Other mandatory programs: $6.2 billion, or 7.3%
  • Other non-defense discretionary programs: $37.2 billion, or 7.3%

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.

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 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. It managed to avoid the cliff but not sequestration.

Effects and Impact

In the short term, sequestration slowed economic growth, although how much isn't clear. 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. 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 2021 was set at $672 billion for defense spending and $627 billion for non-defense spending.

A Congressional Budget Office analysis of President Trump's 2021 budget projected that deficits would total $11 trillion over the next 10 years; mandatory health spending would be reduced by $581 billion and federal revenues would be reduced by $936 billion.