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In the United States federal budget, the sequester or sequestration refers to across the board reductions to the planned increases in federal spending that began on March 1, 2013. The cuts were enacted by the Budget Control Act of 2011 and initially set to begin on January 1 but that date was moved forward by two months by the American Taxpayer Relief Act of 2012. Cuts of approximately $85.4 billion during fiscal year 2013 began to take effect on March 1, 2013.^[1]

The cuts are split evenly (by dollar amounts) between the defense and non-defense categories.^{[note 1]} Some major programs like Social Security, Medicaid, federal pay (including military pay and pensions) and veterans' benefits are exempt. Medicare spending will be reduced by 2% per year versus the planned levels.^[2] The Congressional Budget Office estimates that the sequester would reduce 2013 economic growth by about 0.6 percentage points (from 2.0% to 1.4%) and affect the creation or retention of about 750,000 jobs by year-end.^[3]

Over the 2013–2021 period,^{[dubious – discuss]} the sequester would reduce planned spending by $1.0 trillion with interest savings of approximately $170 billion, for a total of nearly $1.2 trillion in debt reduction or avoidance.^[4] The blunt nature^{[note 2]} of the cuts has been criticized, with some favoring more tailored cuts and others arguing for postponement while the economy improves.^[6]

Contents 1 Legislative history 2 CBO projections 2.1 Overview 2.2 Defense spending 2.3 Non-defense discretionary spending 2.4 Medicare and mandatory spending 2.5 Interest savings 3 Other budget projections 4 Economic effects 5 Timeline 6 Notes 7 References

Legislative history

On August 2, 2011, Congress passed the Budget Control Act of 2011 as part of an agreement to resolve the debt-ceiling crisis. The Act provided for a Joint Select Committee on Deficit Reduction (the "super committee") to produce legislation by late November that would decrease the deficit by $1.2 trillion over ten years. When the super committee failed to act,^[7] another part of the BCA went into effect. This directed automatic across-the-board cuts (known as "sequestrations") split evenly between defense and domestic spending, beginning on January 2, 2013.

The sequestration became a major topic of the fiscal cliff debate. The debate's resolution, the American Taxpayer Relief Act of 2012 (ATRA), eliminated much of the tax side of the dispute but only delayed the budget sequestrations for two months, thus reducing the original $110 billion to be saved per fiscal year to $85 billion in 2013.^[8]

CBO projections

Overview

The Congressional Budget Office (CBO) estimated in September 2011 that the sequester would have the following effects between 2013 and 2021:

• "Reductions ranging from 10.0 percent (in 2013) to 8.5 percent (in 2021) in the caps on new discretionary appropriations for defense programs, yielding total outlay savings of $454 billion."
• "Reductions ranging from 7.8 percent (in 2013) to 5.5 percent (in 2021) in the caps on new discretionary appropriations for nondefense programs, resulting in outlay savings of $294 billion."
• "Reductions ranging from 10.0 percent (in 2013) to 8.5 percent (in 2021) in mandatory budgetary resources for nonexempt defense programs, generating savings of about $0.1 billion."
• "Reductions of 2.0 percent each year in most Medicare spending because of the application of a special rule that applies to that program, producing savings of $123 billion, and reductions ranging from 7.8 percent (in 2013) to 5.5 percent (in 2021) in mandatory budgetary resources for other nonexempt nondefense programs and activities, yielding savings of $47 billion. Thus, savings in nondefense mandatory spending would total $170 billion."
• "About $31 billion in outlays stemming from the reductions in premiums for Part B of Medicare and other changes in spending that would result from the sequestration actions."
• "An estimated reduction of $169 billion in debt-service costs."
• "In all, those automatic cuts would produce net budgetary savings of about $1.1 trillion over the 2013–2021 period."^[2]

Defense spending

The military budget of the United States during FY 2012 was approximately $650 billion in expenses for the Department of Defense (DoD). The DoD baseline budget, excluding supplemental funding for the wars, has grown from $297 billion in FY2001 to a budgeted $534 billion for FY2010, an 81% increase. The U.S. defense budget (excluding spending for the wars in Iraq and Afghanistan, Homeland Security, and Veteran's Affairs) is around 5% of GDP. Adding these other costs places defense spending between 6% and 7% of GDP. DoD spending has fallen from as high as 7% GDP in 1971 to 3% GDP in 2000, before rising to around 5% GDP in 2012.^[4] According to the CBO, defense spending grew 9% annually on average from fiscal year 2000-2009.^[9]

The spending sequester in the Budget Control Act of 2011 (BCA) essentially freezes defense spending in current dollar terms for the 2013-2021 period, limiting growth to approximately 1.5% per year (about the rate of the Consumer Price Index) versus approximately 8% per year over the past decade. CBO estimated defense spending under the sequester (excluding war spending called "overseas contingency operations") from 2012 to 2021 would be $5.8 trillion, versus $6.3 trillion estimated prior to passage of the BCA, an avoidance of about $500 billion in additional spending over a decade. Spending would decline from $562 billion in 2012 to $538 billion in 2013, then slowly rise to $637 billion by 2021.^[4]

Non-defense discretionary spending

Discretionary spending funds the Cabinet Departments and other government agencies. This spending was approximately $566 billion in 2011 or about 4% GDP. This spending has generally ranged between 3.75% GDP and 5.25% GDP since 1971.

The spending sequester in the Budget Control Act of 2011 (BCA) essentially freezes non-defense discretionary spending in current dollar terms for the 2013-2021 period, limiting growth to approximately 1.5% per year (about the rate of inflation) versus approximately 6% over the past decade.^{[clarification needed (see talk)]} CBO estimated spending under the sequester from 2012 to 2021 would be $5.4 trillion, versus $5.9 trillion estimated prior to passage of the BCA, an avoidance of about $500 billion in additional spending over a decade. Spending would stay about the same from 2012 to 2013 ($505 billion and $506 billion respectively) then slowly rise to $597 billion by 2021.^[4]

Medicare and mandatory spending

CBO estimated in September 2011 that "most" Medicare spending would be reduced by approximately 2% per year versus planned levels, for total savings of $123 billion over the 2013-2022 period. Other mandatory spending totaling $47 billion would also be reduced during that period, for a total of $170 billion.^[2]

Interest savings

CBO estimated in September 2011 that interest would be reduced by approximately $170 billion over a decade if the sequester is implemented, due to relatively lower national debt levels compared to the previously planned path.^[2]

Other budget projections

The Center on Budget and Policy Priorities reported in April 2012 that the process for 2014 and beyond is different from 2013:

• "Unlike in 2013, there will be no automatic cut of all affected defense programs by the same percentage; instead, the Appropriations Committees will decide how to live within the newly reduced defense funding caps."
• "For non-defense programs, the process in years after 2013 is the same as in 2013 for entitlements but different for non-defense discretionary programs."
• "Medicare payments to providers and health insurance plans will continue to be cut by 2 percent; in other words, for the entire nine-year period 2013-2021, providers and plans will be paid 98 cents on the dollar. But because Medicare costs are projected to rise from 2013 through 2021, the dollar amount saved by this 2 percent cut will increase, from $11.0 billion in 2013 to $11.4 billion in 2014 and ultimately to $17.8 billion in 2021."
• "Because Medicare will take a growing share of the $54.7 billion annual non-defense cut (it will account for 21 percent of that amount in 2014 but 33 percent in 2021), other non-defense programs will absorb a declining share of the cut."
• "As with defense, the non-defense discretionary cuts will be accomplished through the normal appropriations process as Congress writes appropriations bills to remain within the newly reduced caps for total non-defense appropriations."^{[10][unreliable source?]}

Economic effects

CBO reported in February 2012 that:

• "In the absence of sequestration, CBO estimates, GDP growth would be about 0.6 percentage points faster during [the 2013] calendar year, and the equivalent of about 750,000 more full-time jobs would be created or retained by the fourth quarter."
• "CBO projects that sequestration will reduce the deficit by $42 billion in fiscal year 2013 and that this year’s sequestration and automatic spending reductions next year will reduce the deficit by $89 billion in fiscal year 2014."
• [R]educing the amount of fiscal tightening this year [2013] would strengthen the economy in the short term, [but] the resulting increase in federal borrowing would weaken the economy in the longer term unless other changes in spending or tax policy were made to offset that additional borrowing."^[3]

CBO explained further why it expects the sequestration to reduce outlays by $42 billion in fiscal year 2013, although the the automatic budget cuts total $85 billion: "The $85 billion represents the reduction in budgetary resources available to government agencies this year as a result of the sequestration. But not all of that money would have been spent in this fiscal year in the absence of the sequestration: Some would have been used to enter into contracts to buy goods or services to be provided and paid for next year or in subsequent years. Acquiring major weapons systems and completing large construction projects, for example, can take several years. The $42 billion figure is CBO’s estimate of the reduction in cash disbursements in fiscal year 2013; much of the remaining outlay reductions from the 2013 sequestration will occur in fiscal year 2014, though some will occur later."^[3]

Economist Paul Krugman reported one estimate that implementation of the sequester could cost 700,000 jobs.^[11][12] The International Monetary Fund plans to lower its 2013 GDP growth forecast for the U.S. from 2.0% to 1.5% if the sequester is implemented.^[13]

Federal Reserve Chair Ben Bernanke testified in February 2013 that the Federal government should replace the sequester with smaller cuts today and larger cuts in the future, due to concerns the sequester would slow the economy.^[14] He reminded lawmakers of the CBO's guidance that recent austerity measures were projected to reduce economic growth by up to 1.5 percentage points in 2013 (relative to what it would have been otherwise), of which 0.6 percentage points related to the sequester. Bernanke stated that the long-run fiscal issues mainly related to an aging population and healthcare costs. He wrote: "To address both the near- and longer-term [fiscal] issues, the Congress and the Administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run. Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget."^[15]

Bernanke also explained that although current laws would stabilize the debt to GDP ratio at around 75%, the ratio averaged less than 40% from 1960 to the onset of the crisis in 2008: "This relatively low level of debt provided the nation much-needed flexibility to meet the economic challenges of the past few years. Replenishing this fiscal capacity will give future Congresses and Administrations greater scope to deal with unforeseen events."^[15]

Timeline

• August 2, 2011: President Obama signed the Budget Control Act of 2011. This act provided that, if the Joint Select Committee did not produce bipartisan legislation, across-the-board spending cuts would take effect on January 2, 2013.^[16]
• January 2, 2013: President Obama signed the American Taxpayer Relief Act of 2012, delaying the sequestration until March 1, 2013.^[17]
• February 4, 2013: President Obama signed the No Budget, No Pay Act of 2013, temporarily suspending the debt ceiling until May 18, 2013.^[18]
• March 1, 2013: With no deal reached, all parties concerned seemed resigned that sequestration cuts would take effect at midnight.^[19] Later in the day, President Obama signed an order putting the cuts into effect. He referred to them as being "deeply destructive."^[20]

Notes