Sequestration

Sequestration is defined as something that is locked away so it cannot be used. When applied to the Federal budget, sequestration means that Congress authorizes the U.S. Treasury to withhold funds so that Federal spending cannot push the debt above the national debt ceiling.

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.

Sequestration actually kicked in on March 1, 2013. About $85 billion in spending reductions will automatically occur by the end of Fiscal Year 2013 (September 30, 2013), according to the Congressional Budget Office.

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.

Why would Congress do such a potentially destructive thing, when Congress itself sets the Federal budget? Why didn't it just create a budget that stayed below the ceiling? Basically, the budget planning process has become dysfunctional, thanks to partisan politics.

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.

The stalemate became a crisis in 2011, as existing spending and tax cuts sent the nation's debt toward the predetermined ceiling limit. To avoid a debt default, party leaders finally agreed to appoint a bipartisan Supercommittee to come up with a solution, and then raised the debt ceiling by $2.3 trillion.

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 )

Sequestration means these four main areas will be cut:

1. Military spending - $54.7 billion, or 7.5%.
2. Medicare - 2% cut in payments to providers. In other words, they will get reimbursed 98% of their submitted bills.
3. Other Mandatory programs - 8% across the board cuts.
4. Other non-defense Discretionary programs - 8.4% cut.

Starting in 2014, the percentage cut in all programs will shrink, while the Medicare payments will remain at 98%, until 2021. For more, see Center on Budget and Policy Priorities, How the Budget Sequestration Will Work.

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.

In the short term, sequestration will slow economic growth. That's because government spending is an important component of GDP. Businesses that rely on government contracts will lose business. This includes aid to states, highway construction and the FBI. Unemployment rise rise if Federal agencies are forced to lay off workers. Reduction in payments to doctors means that some would drop Medicare, resulting in fewer choices for patients.

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.

Sequestration was created in 1985 by the Gramm-Rudman-Hollings Deficit Reduction Act. Before then, there was no mechanism to reduce the total size of the Federal budget. Instead, each Congressional Appropriations Committee set the budget for its own area. Congress set the annual Budget Resolution, which set spending limits, and the debt ceiling, which said that the U.S. debt couldn't go above a separate limit, but didn't have control over total spending. (Source: Paul M. Johnson, Department of Political Science, Auburn University, A Glossary of Political Economy Terms)

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