CBO Estimates the Economic Hit of the Sequester

Today, the Congressional Budget Office released a report detailing the projected economic effects of repealing the sequester starting August 1. The report is timely considering the big role the sequester will play in the 2014 appropriations process which is now heating up.

In the report, CBO finds that repealing the sequester starting in August would increase spending by $14 billion in fiscal year 2013 and by $90 billion in fiscal year 2014. CBO concludes that such changes would increase real GDP by 0.7 percent and increase the level of employment by 0.9 million in the third quarter of 2014 relative to the levels CBO currently projects. The full range of possible changes are between 0.2 and 1.2 percent for growth and between 0.3 million and 1.6 million for employment. The central tendencies of their estimates are similar to what the agency found the total effect of the sequester would be in 2013.

Economic Effect of the Sequester
  2013 Q4 2014 Q3
Real GDP -0.6% -0.7%
Employment -750,000 -900,000

Source: CBO

However, CBO notes that growth over the longer term would be harmed if the repeal was done by itself since it would lead to greater federal debt that would eventually reduce the nation's output and income below what would occur under current law. Furthermore, as they say, "boosting debt above the amounts projected under current law would diminish policymakers’ ability to use tax and spending policies to respond to unexpected future challenges and would increase the risk of a fiscal crisis." Although the sequester is mostly a short- and medium-term solution policy for the debt, repealing it would be a step in the wrong direction in absence of a better plan to deal with longer-term deficits.

The sequester represents a poor way to reduce the deficit. Rather than relying on gradual and intelligent changes focused on the drivers of the debt, the sequester results in abrupt, across-the-board, and economically harmful cuts which leaving growing entitlement programs longly unscathed and come to an end after 2021.

Therefore we and many others have advocated that policymakers should replace the sequester on a more permanent basis with a comprehensive deficit reduction plan that makes more gradual and smarter cuts and finds savings in all parts of the budget. Recent CBO numbers show that this would be a win-win for the economy, creating jobs in the short-run and accelerating growth over the long-run while putting our debt on a more sustainable long-term trajectory.

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