Impact of Sequestration

Mar 10, 2013 | by Franck Cushner, CFP®

Impact of Sequestration – Fiscal Policy / Market Fact


Sequestration is the law requiring automatic spending cuts and budget reductions, which came into effect March 1st.  The across-the-board cuts will shrink federal spending by $85 billion for fiscal 2013, which ends Sept. 30, and a total of $1.2 trillion over nine years, out of an annual federal budget of about $4 trillion.


Congress mandated the reductions as part of a 2011 deal to increase the U.S. debt limit under the Budget Control Act of 2011. The cuts would be split almost evenly between defense and non-defense spending. Federal agencies will each have their own share of cuts, affecting numerous agency projects, programs, and ongoing activities.


The Congressional Budget Office (CBO) estimates that the automatic cuts could reduce gross domestic product growth by 0.6 percent while reducing the level of employment by 750,000 jobs. The CBO is a government agency that is strictly nonpartisan and conducts objective, impartial analysis of budgetary and economic issues. Separately, the International Monetary Fund lowered its growth forecast for the U.S., as a result of the effect of the cuts on the overall economy.


The imposed federal spending cuts will affect various sectors of the U.S. economy in different ways. Some believe that as particular services are relinquished by the federal government, then perhaps they might be absorbed by the private sector, thus creating opportunities for certain companies.


Many of the cuts won’t go into affect immediately, but rather will gradually become effective over the over the next few months. Additionally, many of the personnel reductions won’t be felt immediately because of the 30-day notice requirement for furloughs.

Some federal agencies have already outlined some of the immediate and long-term effects of the imposed cuts:



Military programs face $46 billion in cuts through the end of the fiscal year on Sept. 30. Armed forces will be less ready for action, and economic effects will reach every state, according to military officials. Cuts would amount to a 9 percent reduction in all Defense Department accounts except for military personnel, who are exempt.


The Pentagon plans to save as much as $5 billion through furloughs of civilian employees beginning in late April. The unpaid leave, averaging one day a week for as many as 22 weeks, amounts to a 20 percent pay cut for as many as 750,000 employees.


The Air Force also has said it would have to reduce flying hours by as much as 18 percent.


The Navy’s fleet would be reduced by about 50 ships, according to Admiral Mark Ferguson, vice chief of naval operations.



Lines will be longer at airports and seaports as the Homeland Security department loses the equivalent, in hours, of 5,000 border patrol agents, Secretary Janet Napolitano said.


U.S. Immigration and Customs Enforcement officials have released from custody hundreds of immigrants facing deportation. Under the reductions, the service can’t maintain the 34,000 detention beds mandated by Congress, Napolitano told lawmakers.



Cuts would prevent millions of taxpayers from getting answers from IRS call centers and taxpayer assistance centers, and delay IRS response to taxpayers’ letters, acting Treasury Secretary Neal Wolin said.


The agency would review fewer tax returns, and the reduced capacity to detect fraud “could result in billions of dollars in lost revenue,” Wolin added.



Sequestration may cause the Department of Housing and Urban Development to eliminate rental assistance vouchers for about 125,000 poor families, Secretary Shaun Donovan told lawmakers Feb. 14. About 100,000 formerly homeless people could also lose housing, and 7,300 fewer AIDS patients would receive housing assistance.



The National Institutes of Health, the world’s largest supporter of biomedical research, will have to cut about $1.6 billion from its $31 billion budget, director Francis Collins reported.


The Food and Drug Administration plans to reduce travel and training, and approvals for new drugs and medical devices will be delayed, spokeswoman Erica Jefferson said.



At the Justice Department, furloughs can’t be avoided and the department will lose the equivalent of more than 1,000 federal agents, Attorney General Eric Holder discussed.


Staffing cuts will reduce the FBI’s investigative capacity, and the Federal Bureau of Prisons will need to increase lockdowns of inmates as staffing shrinks and the prison population holds steady, Holder said. He said he was “acutely concerned about staff and inmate safety.”


The Federal Aviation Administration in a February 22nd announcement said it’s planning to reduce expenditures by $600 million, furlough most of its 47,000 employees for one day per pay period, and close as many as 238 air traffic-control facilities.



Reductions include $333 million from the Women, Infants and Children program that helps poor people buy food.


Food prices will also be affected by the furloughs of meat inspectors required to cut costs, he said.



Cuts will result in layoffs of 40,000 teachers and aides from pre-school through 12th grade, Secretary Arne Duncan said.


Furloughs at the National Oceanic and Atmospheric Administration (NOAA) run the risk of significantly increasing errors in weather forecasts and compromising government’s ability to warn Americans about hurricanes and tornadoes, Rebecca Blank, an Acting Commerce Secretary, said.


State Department

Sequestration will cut $850 million from the State Department operations budget and $1.7 billion from foreign aid, according to Secretary of State John Kerry. The impact will extend from slowing consular services, such as helping Americans abroad and processing visa applications, to cutting $200 million in humanitarian aid, $70 million in emergency food aid, and $400 million for AIDS relief and other global health programs.



The National Aeronautics and Space Administration would lose about $726 million.

The delays would extend the period the U.S. will need to rely on Russia for rides to space at about $63 million a seat, according to John Logsdon, a professor at George Washington University and the founder of its Space Policy Institute.

Exempt From Reductions & Cuts

Military pay, veterans’ benefits and Social Security benefits will be exempt from the reductions.

The President’s pay of $400,000 a year is exempt from cuts, according to documents provided by the White House Office of Management and Budget. It is set by Congress, which also approves its own salary.

Members of Congress receive an average annual pay of approximately $174,000. Those in leadership posts are paid more, such as House Speaker John Boehner gets $223,500, and House Democratic Leader Nancy Pelosi of California receives $193,400.

In addition, Cabinet secretaries and many other senior agency officials appointed by the president can’t be furloughed because “they are considered to be entitled to the pay of their offices solely by virtue of their status as an officer” rather than by the hours they work, according to Office of Personnel Management document.

Sources:          CBO, White House Office of Mgnt & Budget,

Various U.S. Agencies As Noted

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