The Sequester Worked, But Cuts Still Not Enough

Against all odds, part of the Budget Control Act of 2011 (BCA) forced the federal government to enact $1.2 trillion in spending cuts over nine fiscal years. Despite the heated rhetoric emerging from Washington at the time, the initial cuts from sequestration proved to be modest.

At most, according to the non-partisan Congressional Budget Office (CBO), the sequester reduced spending by a mere $44 billion in the current fiscal year out of the $3.5 trillion in total government outlays.

It should come as no surprise that the majority of the dire predictions made at the time have since been proven wrong.

The federal government should not squander the modest gains in our fiscal situation that these modest spending cuts produced. Reversing sequestration would, in the words of the CBO director Douglas Elmendorf, “lead to greater federal debt … reduce the nation’s income … and increase the risk of a fiscal crisis” in the future.

Sequestration was a blunt instrument requiring cuts across all discretionary spending programs. This alleged “meat cleaver” approach was inevitable precisely because it was a last resort. Facing the need to rein in a deficit of more than $1 trillion, lawmakers still failed to reach an agreement on spending cuts to replace the sequester. A broad-based spending cut solution was the one that special interests were least likely to derail.

The BCA, which gave us the sequester, did exactly that.

It comes as no surprise that agencies were generally able to accommodate the modest cuts implemented this fiscal year with minor reductions in services and short furloughs. Many federal agencies did not even need to furlough employees, and the hardest hit, like the Department of Defense, furloughed far fewer employees than originally estimated for only six days, down from the early warning of 22 days.

The next stage will be harder, but the importance of retaining these gains in fiscal responsibility is correspondingly greater. The newest figures from the Office of Budget and Management show even higher projected spending over the next decade—up $154 billion even from April’s estimates—after a slight improvement in the fiscal outlook for this year.

The decrease in this year’s deficit resulted not so much from the modest sequestration spending cuts, but from increases in taxes—including a return to the old level in payroll taxes and higher income taxes.

According to a 2010 study by former President Obama advisor Christina Romer, co-authored with David Romer, the economy feels the negative impact of tax increases with a one-year lag, and then gross domestic product falls by $1.10 for every dollar increase in taxes.

Reversing sequestration and returning spending to the higher trajectory would mean even higher debt and, consequently, higher taxes in the future. As was the case with the stimulus, it’s uncertain that increasing spending would produce much of a benefit, but there would be a guaranteed cost of even lower growth in the future—and far fewer policy options in the event of another crisis.

In a study co-authored with Harvard economist Robert Barro, my Mercatus Center colleague Veronique de Rugy found that, for a given level of taxes, cutting defense spending reduces the need for public borrowing in the future, They estimated that, over five years, each $1.00 reduction of defense spending would generate $1.30 of extra private spending as GDP grows.

A similar “multiplier” effect would appear with spending cuts in other government programs; it is not unique to defense.

Despite sequestration, federal spending totals are still set to grow, from $3.5 trillion in 2013 and 22 percent of GDP, to $5.7 trillion and 22.2 percent of GDP, according to OMB’s latest figures. This growth is largely driven by mandatory spending programs, like Social Security, Medicaid and Medicare, and effectively mandatory interest payments (because a default on debt is not an option to be considered) which currently consume more than 66 percent of the federal budget.

By 2023, 76 cents of every dollar of federal spending will be consumed by mandatory spending and interest payments, even if government maintains the spending cuts from sequestration.

Sequestration is therefore no more than a very small first step in addressing the nation’s fiscal problems, because legislators limited it to cuts in discretionary spending. The federal fiscal situation cannot improve as long as mandatory spending is excluded from reform.

Modest sequestration achieved at least two things: It put a brake on the spending growth rate, and it demonstrated that spending cuts were possible. The next round of spending cuts might be a little harder, but another round of broad-based cuts is the most likely next step on the path to fiscal sustainability.

Editor’s note: A version of this piece first appeared in the Washington Times.

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