Four Myths About the Defense Sequester

Economic Policy ProgramEconomic Policy Project

The defense cut was actually $16 billion less in Fiscal Year (FY) 2013 than originally planned; some cuts were cancelled, while others were partially pushed into the future by the American Taxpayer Relief Act of 2012 and the March 2013 continuing resolution.

More importantly, the sequester cuts budget authority—the permission for government agencies to spend money—but budget authority only turns into spending (outlays) over the course of several years. For example, in 2013, Congress gave the Department of Defense (DoD) $3.2 billion in budget authority for two new Virginia Class submarines. But that money will be spent over seven years – the actual time it takes to build the submarines.

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MYTH: All of the planned cuts from the 2013 defense sequester are in effect.

FACT: Relative to 2013, the actual cut to defense spending due to sequestration will double in 2014 and triple in 2015. In  FY13,  Congress  gave  DoD  $3.2  billion  for  new  submarines.    

That  money  will  be  spent  over  7  years.    

THE TIME LAPSE BETWEEN GETTING AND SPENDING MONEY

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The Time Lapse Between Getting And Spending Money

Sources: Department of Defense; Bipartisan Policy Center calculations

Four Myths About the Defense Sequester | 2

less than 40 percent of the resulting outlay cuts actually occurred during FY 2013, thereby delaying much of the impact.

While the sequester cut approximately $37 billion from $621 billion in defense discretionary budget authority in FY 2013, the Bipartisan Policy Center (BPC) estimates that

MYTH: The sequester has not affected the economy, despite warnings that it would.

FACT: The defense sequester has already had small but measurable impacts on economic growth and jobs. Those effects will get larger if we leave it in place.

An analysis conducted by Macroeconomic Advisers for BPC found that the defense sequester, if fully implemented, will cut total economic output (gross domestic product (GDP)) by 0.37 percent in the final quarter of calendar year 2013, compared to a world with no sequester.

Additionally, the economic harm, including higher unemployment and slower economic growth, comes from the cuts to outlays, which have not yet been fully implemented.

Therefore, that same Macroeconomic Advisers analysis projects that the economic hit will increase over time, and the fourth quarter of 2015 will see GDP over half a percent lower, 640,000 fewer jobs in the economy, and an unemployment rate three-tenths of a percentage point higher because of the defense sequester – all else equal. The reduction in GDP is equivalent to the output of a metropolitan area the size of New Orleans or Milwaukee.

Remember, too, that this economic impact is from only roughly half of the sequester – the other half falls on domestic spending.

Although we can’t make detailed projections of the economic impacts for the non-defense side, those cuts will be similarly harmful to the economy. Thus, the whole sequester will probably shrink GDP by more than one percent and result in an economy with over a million fewer jobs than would otherwise be the case at the end of 2015.

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640,000 JOBSUNEMPLOYMENT UP 0.3 PERCENTAs if New Orleans or Milwaukee didn’t exist

Most Spending Cuts From FY13 Sequester Won’t Occur Until FY14 & Later

Sources: Department of Defense; Bipartisan Policy Center calculations

Four Myths About the Defense Sequester | 3

As Chief of Staff of the Air Force Gen. Mark Welsh said in his testimony at a November 7 Senate committee hearing on the defense sequester, “If we are given the flexibility to make prudent cuts over time, we can achieve the savings required under current law. However, sequestration robs us of that flexibility. We’re left with options that simply don’t make business sense.”

Savings can and should be found in the defense budget, but across-the-board cuts are a particularly bad way to cut defense spending. There will inevitably be unforeseen increased costs to the federal government from inefficiencies caused by sequestration (e.g., cancelled or delayed contracts, wasted planning).

And these “across-the-board” cuts only biased the military further towards cutting investments in readiness. They curtailed equipment maintenance and training for the Army and Marines, steaming hours for the Navy, and flying practice for the Air Force.

Moreover, the FY 2013 sequester exempted personnel costs by law, so the brunt fell on force readiness and modernization while personnel costs remained untouched on their upward trajectory. The leadership of the Army, Navy, Air Force, and Marines all agree that personnel costs are starting to crowd out other important accounts.

MYTH: The defense budget is bloated with wasteful spending. Sequestration will trim this fat without adversely impacting our national security.

FACT: Because the FY 2013 cuts were abrupt and across-the-board, the accounts that pay for our ongoing security—training troops and providing them with arms and equipment—were reduced, with real consequences for the military’s ability to respond to crises.

A BAD WAY TO CUT SPENDING

Personnel costs have

DOUBLED since 2000, while the active duty force

SHrUNk by 10 percent.

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Otherwise, BPC projects that the sequester will delay the point at which the U.S. debt exceeds the size of its economy by only two years.

If you’d like to learn more about the defense sequester and our methodology for the estimates above, please see our reports: Indefensible: The Sequester’s Mechanics and Adverse Effects on National and Economic Security. Available at: http://bit.ly/1jn678n From Merely Stupid to Dangerous: The Sequester’s Effects on National and Economic Security. Available at: http://bit.ly/17q32Po

The U.S. has a large amount of debt relative to the size of its economy, which will eventually become a serious problem if policymakers fail to make structural reforms. But the sequester does not address the key long-term drivers of our debt problems—the growth of Social Security, Medicare, and Medicaid and the inability of our inefficient tax code to raise enough revenue.

Instead, more than three-quarters of the sequester cuts fall on areas of the budget that are not projected to cause growth in long-term debt—defense and non-defense discretionary spending. But those cuts will serve as a headwind to a more robust recovery from the Great Recession.

Congress can avoid the economic and military harm of the sequester and put the U.S. on a sustainable debt trajectory if it can agree on a plan that restores discretionary funding and addresses entitlements and the tax code.

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BPC 2013 Baseline (Pre-Sequester)

BPC 2013 Baseline (Post-Sequester)

SEQUESTER DELAYS FEDERAL DEBT REACHING 100% OF GDP BY ONLY 2 YEARS

Note:  The  BPC  Alterna0ve  Baseline  assumes  current  law,  except  that:  1)  funding  for  combat  opera0ons  overseas  winds  down;  2)  Medicare  physician  payments  are  frozen  at  2013  levels  (“doc  fix”);  3)  the  sequester  is  waived;  4)  expiring  tax  provisions  are  extended    as  they  have  been  in  the  past;  and  5)  aid  for  Hurricane  Sandy  is  not  extrapolated  for  future  years.  Sources:  Congressional  Budget  Office  (February  2013)  and  Bipar?san  Policy  Center  extrapola?ons  

 

Fiscal Years

MYTH: The sequester may not be the best way to cut spending, but our federal debt problem is urgent and these cuts are a big step in the right direction.

FACT: The debt problems of the federal government are long-term and the sequester does not address the real drivers of fiscal imbalance—rising entitlement spending and an inefficient tax code. Moreover, the sequester will have almost no impact on the nation’s debt burden.

Sequester Delays Federal Debt Reaching 100% of GDP by Only 2 Years

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Note: Baseline is from February 2013. The BPC Baseline assumes current law, except that: 1) funding for combat operations overseas winds down; 2) Medicare physician payments are frozen at the 2013 levels (“doc fix”); 3) the sequester is waived; 4) expiring tax provisions are extended as they have been in the past; and 5) aid for Hurricane Sandy is not extrapolated for future years.

Sources: Congressional Budget Office (February 2013) and Bipartisan Policy Center extrapolations