Gauging the Impact of the Sequester

By: Hammond Iles on March 8th, 2013

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Gauging the Impact of the Sequester

sequester  |  sequestration  |  Wealth Management

The Sequester-Where and how soon might the cuts be made?

As there was no last-minute agreement between Congress and the White House to postpone federal budget cuts scheduled to take effect March 1, the ax now falls. Unless a bipartisan effort somehow undoes them, assorted federal government agencies will have their budgets reduced by $85 billion between now and October 1, as the initial step in a planned $1.2 trillion deficit trimming over the next ten years. (The belt-tightening could have been more severe: without January’s fiscal cliff deal, it would have been $109 billion.)1,2

What gets cut? Broadly speaking, defense programs will take a 13% hit and other federal programs will have budgets decreased by 9%. (This is according to the projection of the White House Budget Office.)2  Government contractors may be among the first to feel the pinch – especially defense contractors, and by extension their vendors. The White House projects the Army, Navy and Air Force having to slash a total of $34 billion this spring and summer, resulting in layoffs or furloughs for 450,000-500,000 workers. USA TODAY forecasts that four states – Virginia, Maryland, Texas and Alabama –will each see between 20,000-35,000 jobs lost as a direct result.3

Some think that the punch to the labor market might end up being double or triple that. A George Mason University analyst recently commented to the New York Times that as many as 1.4 million private sector jobs could be lost when the effects of the sequestration are fully felt, with a third of them coming at small companies.3,4

This potential wave of unemployment wouldn’t just be traced back to military cuts: the Obama administration has mentioned TSA agents being furloughed every tenth workday, FAA air-traffic controllers and Bureau of Prisons employees working fewer hours, and job cuts or reduced workweeks affecting the FBI, INS, FDA, NPS, VA and FHA. State programs linked to federal dollars (such as unemployment benefits, Section 8 housing assistance, foster care programs, Head Start and school breakfast programs, and Meals on Wheels and job retraining programs for seniors) could also soon see cutbacks. Cuts for many of these programs would begin in April.1,2,5

What will escape cuts? While myriad government agencies will face reduced budgets, the cutbacks will not reduce Medicare, Social Security or Veterans Affairs benefits, Supplemental Security Income, Medicaid payments, Pell grants or food stamps. In addition, Medicare Part D subsidies will not be cut.6

That does not mean Medicare or Social Security recipients will escape the impact of the sequestration. Some SSA offices might close on certain days of the month or even for weeks or months – and the lines and waits at those offices could get longer. Medicare payments to doctors are slated to be reduced 2%.6

Is there an undo button? Sort of. Congress might find it later this month, or in April, arranging a short-term fix, much like when the fiscal cliff bill passed.  Taxes could be raised here, pork could be trimmed there, and a little more time bought ... time that could be used to improbably craft the “grand bargain” President Obama spoke of in 2012, or to give federal agencies a greater say in what gets cut. After a few weeks of sequestration, f respondents saying deficit reduction should be a top federal priority.7

1 - www.reuters.com/article/2013/03/01/us-usa-fiscal-idUSBRE91P0W220130301 [3/1/13]
2 – abcnews.go.com/Politics/OTUS/questions-answers-sequester/story?id=18623605&singlePage=true [2/21/13]
3 – www.usatoday.com/story/news/nation/2013/02/19/army-state-by-state-sequester-details/1931051/ [2/19/13]
4 –http://boss.blogs.nytimes.com/2013/02/21/many-expect-budget-cuts-to-hit-small-businesses-hard-but-not-the-n-f-i-b/?_r=0
5 – www.civilrights.org/census/your-community/funding.html [3/1/13]
6 – aarp.org/politics-society/government-elections/info-02-2013/how-the-sequester-could-affect-social-security-and-medicare.html [2/19/13]
7 – www.cbsnews.com/8301-250_162-57570484/poll-40-say-let-the-looming-budget-cuts-happen/ [2/21/13]
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