By now you realize that by March 1st, 2013 a series of automatic spending cuts will kick into effect for the next 10 years unless Democrats and Republicans reach some sort of agreement on exactly how to match those cuts/revenues. These cuts were agreed to by both parties and signed into law by the President so that he could avoid an ugly debate occurring during his presidential election (last November). They were set to start January 1st. But in true Washington, DC fashion no agreement could be reached by then and they were pushed back to March 1st.
So what exactly is going to happen? Over the next decade around $1.2 Trillion will be cut from the federal budget. Let’s put things in perspective, that’s around $120 Billion/year (actually less for 2013/2014 as they’re gradual). In FY2012 the US Government enacted spending of $3.796 Trillion. But we don’t make that much money, the Government borrowed $1.327 Trillion in loans to cover the difference between revenue and spending. These cuts are designed to eat into that deficit because borrowing $1 Trillion+ every year is completely unrealistic. So for 2013 we’d see around 3% of the Federal Budget cut. But the Federal Budget would still be higher every year as spending would still increase even with cuts. Funny, I know.
So here we stand with both sides disagreeing over the agreement they put into place. The whole time arguing that they didn’t think it would actually happen. NICE. Yet at the end of the day what’s the best move? Well if we look at GDP there’s a bit of a concern.
As we can see by the red trendline on the graph, GDP growth took a severe dip last quarter as military spending subsided late in the year. Fascinatingly, the majority of the cuts from the $1.2 Trillion over the next decade come from….the military. So we’re in a situation where we’re now arguing about what to cut or if we can stem cuts with more tax increases. The concern is that too much of a cut too soon will kill GDP growth further and hurt employment. On the other side is the problem of borrowing $1 Trillion+ per year, which is not advisable (though many economists would debate that wisdom).
At this point, while Washington bickers about who’s to blame, should something go wrong, I think there’s an interesting situation emerging. In the absence of any deal making, the cuts may stick, and oddly, that might be a good thing. By forcing our own hands through an agreement no one wants to claim as their own, we may be pushed towards fiscal responsibility. That might help. For the past 5 or so years Washington has claimed cutting anything is toxic, a GDP killer. So we borrowed over $5 Trillion (let me write that out for you $5,000,000,000,000) in loans to cover the past 4 years or so of spending. Whacky. That stimulus has come and gone though. We can’t have unlimited stimulus, at some point there’s a diminishing return. So now we’re left with trying to ease our way out of this spending spree, and maybe, just maybe, these unwanted cuts are the method of doing so.
We shall see.