How Sequestration Undermines Its Own Deficit Cutting Purpose

When President Obama orders budget sequestration at the end of next week, agencies across the federal government will begin to reduce spending on all of their functions.

That’s as intended. Sequestration was intended to scare lawmakers into passing a more considered deficit reduction package — but party leaders agreed that if Congress failed to replace sequestration, then imposing it should have the dual impact of harming a broad range of interest groups and reducing annual budget deficits.

But though the sequester itself calls for $85 billion in spending cuts for the remainder of the fiscal year, and $1.2 trillion in cuts over its 10 year lifespan, its intentionally clumsy composition, combined with its negative economic impact will cut against its deficit cutting potential, if it’s allowed to remain in effect for a significant amount of time.

In other words, sequestration undermines the very goal the lawmakers who designed it were trying to accomplish.How does that work? Why doesn’t cutting spending across the federal government by a defined amount not just reduce the deficit by that same amount? Part of it is just simple economics: Lower spending means lower GDP means fewer revenues. But the nature of the cuts themselves will slow federal revenue streams and have other unintended consequences that will counteract its deficit reducing punch as well.

The Congressional Budget Office took a look at sequestration and other scheduled fiscal tightening in November of last year, to provide an estimate of how much each element would harm the economy.

Analysts concluded that sequestration’s defense cuts would shave about 0.4 percent off of GDP and cost nearly half a million jobs by the end of the fiscal year. Its domestic cuts, the analysts projected, would be somewhat less economically damaging, since a smaller percentage of that spending consists of direct purchases.

But a smaller economy, and fewer employed people means fewer tax receipts and more safety net spending.

Scott Lilly, a budget expert at the liberal Center for American Progress did some quick math on sequestration’s revenue reducing consequence and estimated that it will cost the Treasury about $17 billion this year.

Burrow in deeper, though, and it turns out sequestration will actually undermine itself in other ways.

“[U]ser fees fund many of the functions of the government that are subject to the sequestration,” Lilly writes. “To the extent that sequestration reduces the ability of government to perform these functions, these fees will not be collected.”

Lilly cites aviation. Under sequestration, FAA will have to cut all of its activities by a total of $500 million by the end of the fiscal year. That means fewer air traffic controllers on the job, which in turn means fewer flights, fewer ticket sales, and thus fewer tax payments into the Airport and Airway Trust Fund.

“If the 9 percent reduction in time worked by controllers results in only a 5 percent reduction in takeoffs and landings, the government will lose roughly $320 million of the $6.4 billion it would otherwise collect in user fees for the rest of the year,” more than half of the savings sequestration was support to wring from FAA, according to Lilly.

Rinse, repeat across a dozens of government agencies that are financed in party by user fees. Similarly, the Government Accountability Office has concluded that one likely consequence of slashing Internal Revenue Service funding — an already cash-strapped agency — would be to decrease revenues by seven times the amount of the budget cut.

“Based on that arithmetic,” writes Lilly, “sequestration will cut the agency’s budget by a little more than $600 [m]illion and result in a $4.5 billion loss in tax revenue.”

CBO didn’t address the projected budgetary effects of sequestration when it analyzed the Budget Control Act (better known as the debt limit deal) which set it into law, because automatic cuts were never intended to take effect. Now that they are, it’s clear that these feedback effects significantly undermine the sequester’s role as a back-up deficit cutter.