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Sequestration Threat Returns

February 8, 2013

As a result of  January's fiscal cliff negotiations, Congress opted to delay the budget sequestration process by two months. With the March 1st deadline rapidly approaching, Congress once again finds itself working against the clock to strike a compromise that will avert automatic spending cuts  across all agency budgets.

If Congress is unable to reach an agreement that will avoid the sequester, all government agencies will face automatic cuts to their budgets. Public agencies will be forced to undertake layoffs, programs will be eliminated, and private sector industries which rely on the government for a large portion of their business will find their opportunities to be severely curtailed.  Most hard hit will be the Department of Defense, which would be forced to undertake a $500 billion across-the-board reduction in discretionary spending over the next nine years. For 2013 alone, DOD would experience a seven percent decrease in total funding for its budget. Other public agencies would share the same fate, with all budgets being reduced by at least five percent in 2013.

The repercussions of the sequester would be felt across the country. DC based think tank, The Economic Policy Institute, estimates that sequestration will result in 689,000 job losses and a .6 reduction in GDP this year. More dire are the predictions from the Congressional Budget Office (CBO) which estimates that potential job losses could reach 1.4 million. Furthermore, when coupled with an economic contraction the CBO estimates that the unemployment rate could rise to 9.1 in the fourth quarter of 2013. Such consequences are likely to severely hamper a U.S. economic recovery.

While both Democrats and Republicans are cognizant of the consequences of allowing budget sequestration to take place, coming to an agreement on how to prevent its occurrence remains an elusive task. Congressional Democrats are keen to support an agreement that will delay the sequestration cuts while also providing for additional revenues from tax increases, namely the closing of various corporate loopholes. On the other hand, Congressional Republicans are adamantly against supporting any further revenue increases, and are instead calling for sequestration to be replaced by spending cuts. For their part, the Obama administration has called for a bill that will delay cuts by replacing them with a combination of tax increases and spending reductions.

Several scenarios appear in the horizon. First, Congress may fail to reach an agreement by March 1. If such a failure occurs, the budget sequester will occur. Second, Congress may reach an agreement on a stop-gap measure. An agreement by Congress, one which includes either a combination of tax increases and spending cuts, all tax increases, or only spending cuts, will effectively serve to "kick the can down the road", setting Congress up for another battle in the near future. Third, Congress will come to an agreement that makes up for the entire $1.1 billion sequester cuts expected in the next nine years. Given the scope of the planned sequester cuts, such an agreement would have to include sizable cuts and tax increases. It is unlikely Congress will reach such a compromise.

With the clock ticking on the budget sequester, Congress finds itself in a familiar position. Both the fiscal cliff and debt ceiling negotiations produced last minute agreements which averted damaging repercussions for the recovering U.S. economy. Unless Congress is able to effectively delay the budget sequester or craft a broad scale package that would effectively end the looming sequestration threat, the prospect of across the board budgetary cuts and the resulting consequences will remain probable.

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