ABA Banking Journal - March 2013 - (Page 8)
BY Carl Tannenbaum
The good and bad of sequester cuts
The markets closely watched the March 1 deadline
when the federal government spending cuts of $85 bilBillions of dollars
lion in fiscal year 2013 were to take effect as per the
Budget Control Act. Often referred to as the “sequesCare Act $7
ter,” this event was the first installment of a $1.2-trillion
reduction in government spending to be put in place
over a period of nine years.
Some analysts have hailed the sequester as a credible
budget-reduction program. And that it is. Assuming
the entire gamut of spending cuts occurs, the CongresInterest
sional Budget Office (CBO) estimates that the federal
deficit would shrink to $845 billion and $616 billion
in fiscal years 2013 and 2014, respectively, from $1.09
trillion in 2012. If these estimates are accurate, the
economic ramifications are largely positive. Pressure
on interest rates will be reduced as the federal government’s participation in credit markets declines.
Yet, a decline in federal-government spending directSource: CBO
Total: $1.2 trillion
ly reduces real growth, and potential offsets follow with
a lag. Assuming a fiscal-spending multiplier at the midpoint of the CBO’s stated range, our current estimate
Congress must pass the federal
of real GDP growth will be reduced 0.5% in 2013 (fourth quarter to fourth
budget for the next fiscal year by
quarter) if all provisions of the sequester take effect.
April 15 to prevent a delay of their
Drilling down to the details of the likely cuts in government spending
members’ paychecks. Lawmakers
reveals the micro aspects. A 50% reduction in discretionary defense outlays
also struck a deal earlier in the year
is baked into the provisions of current law, implying that defense operations
that temporarily suspended the statwill suffer a sizable setback. Reduced funding for schools would translate
utory debt ceiling until May 18.
to fewer teachers and cutbacks in a wide range of programs. Federal-govEffectively, Congress has to conernment expenditures related to food inspection, air traffic control, and law
tend with three deadlines between
enforcement would be pared back. Cuts to border and port security could
now and mid-May, and the unceraffect the volume and timing of trade flows. So, we all are likely in for some
tainty surrounding them will not
level of inconvenience.
help economic performance. One
Social Security and Medicare programs are not subject to a change, while
can hope that the second half of the
there will be a 2% reduction in payment to Medicare providers. Essentially,
year will be free of budget hoopla,
nearly all federal agencies must scale back outlays over the remainder of fiswith only economic fundamentals
cal year 2013.
driving market movements. n
In addition to the sequester, Congress faces a series of other deadlines
in the coming weeks. The current “continuing resolution” enabling funding
Carl Tannenbaum is senior viceoperations of the federal government expires on March 27. Failure to renew
president and chief economist at
this authority could result in a temporary shutdown of the federal governNorthern Trust Corp., Chicago.
ment. Yet, as Congress deliberates the details of a new resolution, there is
He is a member of the ABA Economic
room to soften the blow of the sequester.
8 | ABA BANKING JOURNAL | March 2013
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ABA Banking Journal - March 2013
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ABA Banking Journal - March 2013