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Kimberly Amadeo

Sequestration May Be Delayed Until September

By February 8, 2013

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Senate Republicans announced a plan to delay the mandatory Federal budget cuts, or sequester, beyond the March 1 implementation date. They want to put off any cuts until the end of the FY 2013 budget year, which ends September 30, 2013. Instead, they propose to cut Federal labor costs through attrition over several years starting with the FY 2014 budget.

This plan will have an immediate positive effect on the economy by giving it another nine months to improve before cuts take place. Government spending is a component of GDP, so any cuts have a direct negative effect on economic growth. Defense spending cuts were one reason the economy contracted last quarter.

However, the plan has several negative impacts. First, it focuses all cuts on hiring. This will hurt job creation, possibly increasing unemployment. This is exactly the opposite of what the government should be doing. Second, it constrains the ability of department heads to manage their own budget. They may be able to find greater efficiencies in other areas, such as purchasing, that will go unaddressed. Third, attrition is a terrible policy. Managers are less likely to terminate poor employees, because they know they won't be replaced. This hurts morale, and leads to lower productivity overall.

House Republicans proposed a countermeasure. It would require any President to show a balanced budget somewhere in the five-year projection that's part of any budget plan. It's good in that it at least forces the government to project how the budget could be balanced. On the other hand, President Bush showed how the budget would balance in five years, and yet it never did. In other words, budgets are changed every year, so the bill would not really accomplish the goal of reducing the debt.

These proposals just show how difficult it is for elected officials of any party to cut the Federal budget at all. Every dollar cut affects a voter or donor somewhere, who will withdraw support. Perhaps the best solution is to simply adopt the Simpson-Bowles plan and be done with it. This would allow America's businesses to return to business as usual, which ultimately will create the most jobs.

What It Means to You

President Obama will give his 2013 State of the Union address next Tuesday. He will submit his FY 2014 budget a few weeks later. Let's see if he takes a leadership role on this issue. It needs to be resolved quickly so that it doesn't slow down economic growth in 2013 just like it did in 2012.

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