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Sequestration and the Economy

Sequestration and the Economy

On March 1, 2013, the US Government did something that many people thought that they would never see. It started spending less money.

The word that has been at the top of every newscast for the last few weeks is: sequestration.

Se·ques·tra·tion  [see-kwes-trey-shuhn, si-kwes-]

Noun: 1. removal or separation; banishment or exile. 2. a withdrawal into seclusion; retirement.

We thought it was good to start with a better understanding of the actual word and how it has gotten into our everyday language. The clumsy process that has us where we are now, stretches back to the summer of 2011 with an agreement between the two parties to address the need for a reduction in spending.

Are these spending cuts, sequestration, good for our country? It is hard to tell. Our government spending makes up 24% of our nation’s annual income, the US GDP1. Spending less without hurting the US economy is a hard task to accomplish. So, what is happening now, what is happening next, and how may it affect the economy and you?

What’s happening now?

  • $85 billion in spending cuts start taking place on March 1. $42.7 B is cut from defense spending. $26.4 B is cut from nondefense spending. $11.1 B is cut from Medicare. $5.2 B is cut from other areas. These cuts must be accounted for before September 30, which is when the US fiscal calendar ends.2

What happens next?

  • March 27, funding expires for certain federal agencies and programs, possibly causing a partial government shutdown. This is unrelated to the sequester.
  • April 15, a budget must be passed by both the US Senate and the US House or the lawmakers of the chamber that fails to do this will not be paid.
  • May 18, the temporary debt ceiling limit must be voted on. Currently, there is not a set debt ceiling. A new debt ceiling, which is the approved amount that the US Government can borrow, must be voted on.
  • September 30, the US federal budget year ends.
  • October 1, the new budget year begins, triggering a second year of sequestration cuts.2

How may this affect the economy and maybe you?

  • The International Monetary Fund, IMF, has forecasted that the US economy will grow in 2013 by 2%. For a comparison, our economy grew in 2011 at 1.8% and 2012 at 2.3%. Yes, this is historically slow growth. However, it is growth.
  • The IMF predicts that the sequester could slow the US economic growth to 1.9%.3

The important question is how this affects you. The US Government is not a household, so its budget/checkbook should not be thought of in those terms. Our economy is growing. The markets have had a great rally. Both are positive indicators. Politics and actual spending cuts could cause some volatility in the markets, even pull backs at times. However, many forecasts, the IMF included, are pointing to positive US growth for the second half of 2013.

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1Congressional Budget Office

2WSJ.com – “Cuts Roll In as Time Runs Out.” 2-28-2013

3IMF – WEO January 2013


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