Alan Kohler is one of Australia’s most experienced commentators and journalists. Alan is the founder of Eureka Report, Australia’s most successful investment newsletter, and Business Spectator, a 24-hour free business news and commentary website. He also hosts Inside Business, a half-hour Sunday programme on the ABC, is the finance presenter on the ABC News - and producer of the nightly graph (or two).
Barring an unexpected breakthrough agreement between the Democratic senate and the Republican house, the federal US budget will be subjected to a sequester which will reduce discretionary spending by about $US86 billion in calendar 2013. That $US86 billion is only a bit more than 10 per cent of the "fiscal cliff” that faced the country at the end of the year. It’s a painful cliff, but not a large one. The American Taxpayer Relief Act resolved most the cliff problem, but the Congressional Budget Office says that the sequester will reduce short-term growth in an already slow economy. On the other hand, no sequester at all would mean an even greater reduction in long-term growth.
The worst feature of the sequester is that it is the wrong way to reduce spending. The cuts are mandated across-the-board in most discretionary spending areas. The good programs will be cut along with the bad. The most hard-hit casualty will be the US Defense Department. It can stand cuts, but they need to be carefully selected. The sequester does not select. The sequester meat-axe slices muscle along with the fat.
It is hard to believe that allegedly smart people could have agreed to such a device. The president and the leaders of both houses signed off on the sequester in the belief that because it was so bad it would force them into a compromise deficit/debt reduction plan despite their philosophic disagreements.
As it seems to be turning out, US representatives’ philosophic disagreements are more precious to them than the health of the nation’s economy. Republicans want to protect tax rates and Democrats want to protect entitlement programs. They would prefer the sequester, admittedly smaller than the tax cliff, to any form of compromise.
The moment of truth is only a week away. Most odds-makers believe the sequester will actually occur. However, the policymakers do have other choices:
1) They could postpone it, in hopes of making a later deal;
2) They could trash the sequester, and sacrifice long-term growth for another short-term fling;
3) They could give the executive departments leeway to make the cuts where best tolerated; or
4) They could live with the sequester for a few weeks or months, and then holler "uncle” and opt for (1) , (2), or (3) above.
This writer believes that the sequester will happen. However, when airport security lines triple, the national parks open later and close earlier, and our military tours abroad are extended, there is a good chance that Congress will begin to rethink the problem, particularly with respect to the DOD. If so, at that point, it is critical that Congress replace a dumb cut with a smart cut of equal value, rather than deferring or repealing the sequester.
Our debt is already high. The CBO sees it going higher rather than stabilising under the most likely budget scenarios over the next 10 years. The president’s budget drives the debt ratio up around 80 per cent in 10 years. That’s one reason why cancellation or deferral of the sequester would be unwise. Over 10 years, the sequester would save well over $1 trillion. Another reason is that it makes no sense to swap short-term faster growth for long-term reduced growth.
If no comprehensive compromise (one with total 10-year reductions of Bowles-Simpson proportions) is in sight, it is better to accept the stupid cuts of the sequester than to postpone deficit/debt reduction plans again. The best plan would be smart cuts. The sequester is a distant second choice, but, clearly, it is better than nothing.
A US congressman for 20 years, Bill Frenzel has specialised in budget issues and tax policy. He was the ranking minority member on the House Budget Committee; advised President Clinton on NAFTA; and advised President Bush on Social Security and tax reform.