The phrase "sequestration cuts" is on the tip of everyone's tongue in Washington, with those across-the-board spending reductions set to go into effect on March 1. But some naysayers have pointed out that those cuts are not really cuts. Is that true?
In one sense, yes. Sequestration cuts are slated to reduce government spending by around $1 trillion over 10 years—largely from defense and other discretionary spending. Those are some of the most commonly cited figures. But it's also true that under current law, discretionary spending is still slated to increase by around $110 billion over the next decade, as Paul Gregory, an economist at Stanford's Hoover Institution, pointed out this week at Forbes.com.
The Congressional Budget Office projects that discretionary spending, at $1.3 trillion in 2012, is likely to be around $1.4 trillion in 2023.The argument isn't new, either; it's been around since the sequester was conceived. Veronique de Rugy, a fellow at the Mercatus Center at George Mason University—like the Hoover Institution, a right-leaning institution—pointed out in 2011 that the sequester would merely reduce the rate of spending growth.
So spending is going to grow, even with sequestration cuts, but that doesn't mean the budget changes are any less real. That's because the math of budgets is more complicated than simple growth trajectories. When considering spending and deficits, it is crucial to consider those figures relative to GDP.
Put more simply, when the economy is large and growing, then large and growing deficits take on a very different meaning than in a small or stagnant economy, says one expert.
"The headline writers like to say the deficit is a trillion dollars. But if the economy were half or twice as large, that would have a different meaning," says John Makin, a resident scholar at the conservative American Enterprise Institute and a veteran of the CBO and Treasury Department.
That means that taking deficits downward isn't the only way to make them seem less of an economic hit; simply holding the deficit steady while the rest of the economy grows in a sense makes that deficit "smaller."
"Example: [Republican Representative] Paul Ryan says we've got to take the deficit to zero," says Makin. "It's interesting to realize that if you could freeze the deficit at about $500 billion dollars, by the time you get to 2022, you'd have a substantially lower ratio of debt to GDP. In other words, it would be a very good accomplishment."
It's a little like putting a thousand dollars on your credit card each month—if your $60,000 income increases over time to $100,000, that level of spending looks a bit more manageable.
According to CBO projections, the federal deficit, which equaled around 7 percent of GDP last year, is expected to plummet to around 2.4 percent of GDP in 2015, then rise to around 3.8 percent in 2023—a rise largely due to growing entitlements.
Still, it's worth pointing out that debt will continue to grow, from around 73 percent of GDP last year to 77 percent in 2023. Even with sequestration in place, debt will hit 100 percent of GDP just two years later than if the cuts are avoided, according to the Bipartisan Policy Center.
Of course, sequestration was initially intended purely as a way to scare lawmakers into action, not as a thoughtful, long-term path to fiscal sustainability. And there is a very strong economic case for keeping deficits and debt in check, as too much debt could hurt output and crowd out private borrowing.
CBO estimates show that the larger the deficit reduction, the more it hurts the economy in the short run but boosts output over the long term. With the economy still limping toward recovery, says one expert, it would make the most sense for Congress to find a way to boost deficit reduction as the economy recovers.