The Sequestration
It's February 28, 2013, and the man-made fiscal cliff 2.0 is upon us. What will Congress do? Will a compromise be reached or will automatic spending cuts (sequestration) take effect? And what about the debt ceiling - we're about to breach that again too.
The federal government is dealing with three important fiscal issues: taxes, spending, and debt limit. At the beginning of 2013, the federal government reached agreement on increasing income taxes, but decided to put off addressing spending and debt limit until later in the year. The agreement reached on income taxes is projected to raise $620 billion over the next 10 years (or $62 billion per year).
We are now at the deadline for addressing spending. If nothing is done, a 10% cut will occur (sequestration), split evenly between defense and non-defense discretionary spending. Sequestration is projected to reduce federal government spending by $1.2 trillion over the next 10 years (or $120 billion per year).
What do the numbers mean? On average, the federal government has taken in $2.26 trillion and spent $3.59 trillion per year each of the last four years. The combination of increasing taxes ($62 billion) and sequestration ($120 billion) will certainly help to close that gap, but it won't solve the problem entirely.
Using my household example from the last edition of News & Views, our federal government is like a family with an average income of $112,997 and average expenses of $179,656 per year. To address the problem, they decide to work one additional hour per week (raise taxes) to generate $3,100 in income for the year and to reduce spending (sequestration) by $6,000 for the year.
What is the likely outcome? My best guess is that sequestration goes into effect and that the sun comes up tomorrow. Spending cuts are painful, but necessary.
