This year about $85 billion of cuts to the discretionary portion of the US budget will be implemented, at least under current law which, as we know, could change. Dire consequences have been forecast. Could these forecasts come true?
First of all, we’ve spent a couple hours with the Congressional Budget Office papers on this topic, as well as other writings, trying to understand one thing: are these really cuts or do they merely slow the rate of growth of spending? As best as we can tell, these will be real cuts, such that the federal government will spend less on many things in 2013 versus what was spent in 2012. However, Social Security, Medicaid, federal interest payments, and several other programs are exempt from the cuts. There will be only a modest cut to Medicare reimbursement rates. So while a part of the budget will be reduced, another large part will keep growing.
The amount of the cuts in 2013 – at $85 billion – is around 0.5% of the overall US economy, and that’s overstated, because it is based on the US GDP in 2011, and the economy grew in 2012.
Will this mean a hit to the economy – a recession, job losses, an uptick in the unemployment rate? Not likely. The size of the cuts is minuscule relative to our economy and the cuts are lagged, with the full effect unfolding over months rather than immediately. For evidence that informs our opinion, we looked to state budget cuts from 2009 through fiscal year 2013. In fiscal 2009, states had to cover budget gaps of $110 billion – that’s for one single year. In 2010, it was a huge $191 billion gap; the following years the gaps were $130 billion, $107 billion and for this year, $55 billion. Yet despite this drag, the economy began growing in 2010, posting 3% for the year. An $85 billion cut from the federal government will be less than any of those single years, except 2013, and our economy is healthier now. In out years, as the sequestration continues, we expect state and local hiring to pick up, taking up some or all of the slack from the federal level austerity. In fact, we are particularly lucky in that the synchrony of these events is allowing for slower deficit spending – something that is crucial to the future health of America’s economy.