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Federal budget cuts: Impact and implications

Darrell Spence
Based in:
Los Angeles
Investment experience:

DARRELL SPENCE: The sequester is going to have an impact on the economy, but it will probably be less than the $85 billion number that is in the press and, in fact, the sequester mandates to happen. That is because there are ways for the federal government to push some of the spending cuts into next year. So we think it will be about half of the announced $85 billion that will actually impact the economy, which is about 0.3% of GDP. It’s not a meaningless number, but it’s probably not enough to derail the recovery that is still going on in the U.S. And in fact, it’s a much smaller number than the payroll tax hike that we got at the beginning of 2013.

One thing I think needs clarification about the actual spending cuts is, when we’re talking about spending cuts in the out years [beyond 2014], they’re not cuts in the true sense of the word. They’re basically levels of spending that are below what the CBO [Congressional Budget Office] has estimated spending will be over the next 10 years. It’s a little less draconian than it sounds like it might be when you’re talking about $1.2 trillion in spending cuts. It’s really $1.2 trillion less spending than we would have gotten under the CBO’s baseline, but it doesn’t mean that spending on the federal government side doesn’t continue to grow; it just grows at a rate that’s less than currently forecast.

If we get the $1.2 trillion over 10 years that the sequester mandates, it will help in terms of reducing the budget deficit, but it won’t necessarily put us on the road to long-term fiscal solvency. Part of the reason for that is the sequester doesn’t mandate spending cuts in the areas where spending is really growing most rapidly, and that is entitlements, primarily Social Security and Medicare.

The total dollar amount of the sequester represents somewhere between 2% [and] 2.5% of government spending, so the cuts that we’re asking the Federal government to do are really not all that significant. I think when you look across most sectors of the U.S. economy — whether it be corporations, whether it be individuals — they’ve all made cuts probably (or many have, at least) of a similar magnitude. It’s probably not too much to ask that the federal government do the same if it helps put us on the path to longer term fiscal solvency.

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