Congressional Budget Cuts and the Sequester

Tree just falling

Tree just falling (Photo credit: National Library of Scotland)

With earnings season winding down and the “debt ceiling” suspended until May 18th, traders have had ample time to shift their focus to the March 1st congressional sequester (which was originally scheduled to take place on Jan 1).

With the deadline for a deal looming, and both sides still pretty far apart, this promises to be a volatile issue in the coming weeks. Ok, so what exactly is the “sequester” anyway? According to the Congressional Research Service, "In general, sequestration entails the permanent cancelation of budgetary resources by a uniform percentage. Moreover, this uniform percentage reduction is applied to all programs, projects, and activities within a budget account”. So at the end of the month, if almost $1.2 trillion in deficit reductions are not agreed upon, this will become a reality.

Over the years, a growing number of programs have been exempted from these cuts. Certain areas of government spending are off-limits – including war spending. In addition, some domestic spending programs – including Social Security, Medicare, Medicaid, Veterans’ benefits, food stamps and federal retirement programs – are also safe. 

With the increase in exempt programs, this means that those left “unexempt” have to incur much steeper cuts in order to achieve the total cutbacks required. The administrative costs within federal agencies, spending on programs for economic development, vocational education, employment training, aid to the states, and research grants to name a few. For example, The Department of Health and Human Services, would be forced to absorb cuts of about $6.6 billion – while Homeland Security, Education and HUD would each be cut by about $3.7 billion.

What impact could the sequester have on the U.S.? Overall, the White House predicts it would cause the economy to shed hundreds of thousands of jobs, and would cut U.S. Economic growth in 2013 in half. What does the Street think will happen? A recent survey of money managers from the Potomac Research Group reveals 53% of respondents expect sequester cuts to take effect beginning March 1, while 47%believe a deal will be struck in time to avoid them. With relatively little progress being made thus far, we should expect a flurry of activity as the White House and Congress try to come to an agreement by month end.

Enhanced by Zemanta