What Is Sequestration?:
When this happens, the funds to run Federal agencies are "locked away," or sequestered, making them suddenly unavailable. Agencies that had hired workers and established programs based on that fiscal year's budget are without funds, and must cut costs by laying off those workers and shutting down those programs.
What Is the Current Sequestration Crisis?:
Sequestration was originally supposed to occur beginning January 1, 2013 if Congress didn't resolve the fiscal cliff.This sudden shift in fiscal policy would have subtracted $607 billion from Gross Domestic Product (GDP) For updates on the fiscal cliff negotiations, see Fiscal Cliff 2013.
What Caused the Sequestration?:
Here's exactly what happened. In August 2011, Democrats and Republicans could not agree on the the best way to reduce the budget deficit. Democrats refused to extend the Bush tax cuts for families making $250,000 or more, saying that the wealthy could best afford the higher tax rates needed to bring in more revenue. They also leaned toward cuts in defense, and away from mandatory programs like Social Security, Medicaid and Medicare. Republicans, on the other hand, argued that high-end tax increases would slow job creation among small businesses, and that the mandatory entitlement programs fostered a nation of dependency.
However, the Supercommittee failed to come up with a plan by the November 23 2011 deadline, even ignoring the reasonable recommendations of the Simpson-Bowles Report. This failure triggered the sequestration.
It wasn't until after the 2012 Presidential election that the lame duck Congress could refocus on the budget, in a last-minute attempt to avoid sequestration and the rest of the fiscal cliff. The most likely outcome is that a solution will be negotiated in time. For more, see And Now...Avoiding the Fiscal Cliff. (Source: Suzy Khimm, Wonkblog, The Sequester Explained, September 14, 2012; CP Politics, What Is Sequestration, October 25, 2012 )
What Specifically Would Be Cut If Sequestration Isn't Stopped?:
- Military spending - $54.7 billion, or 7.5%.
- Medicare - 2% cut in payments to providers. In other words, they will get reimbursed 98% of their submitted bills.
- Other Mandatory programs - 8% across the board cuts.
- Other non-defense Discretionary programs - 8.4% cut.
The threat of sequestration makes budget planning for FY 2014 difficult. Do you base next year's budget on current spending, or on the assumption that sequestration cuts take effect? The uncertainty means that Federal agencies are on hold in terms of making decisions about personnel and contracts.
How Sequestration Affects You:
Although it's good in the long-term to reduce the deficit, in the short-term it will create a snowball effect in the wrong direction. Sequestration will translate into lower income for everyone, which ends up netting less tax revenue for the government.
History of Sequestration:
These measures are kind of like the desperate attempts an addict uses to stop drinking, smoking or shopping. Sequestration is like throwing away all the liquor in the house, flushing cigarettes down the toilet or cutting up credit cards. These actions don't get at the underlying cause. In Congress' case, spending is what attracts votes. Unfortunately, the very nature of the democratic process is at odds with fiscal responsibility. For more on why this is, see Budget Deficit Definition. Article updated February 11, 2013