After the fiscal cliff and debt ceiling negotiations, one would think that the drama in Washington would be minimal for the next few months. Contrary to that, you have more than likely heard something about the so-called “Sequester”. The 2013 Sequester refers to the reduction of government spending by roughly $85 billion in 2013 (This is simply a reduction in spending. Federal outlays will still increase by more than $200 billion annually). The effects of these cuts are a hot topic of debate between Republicans and Democrats.
The Sequester has been planned for nearly two years. It was enacted by the Budget Control Act of 2011 after tense debt ceiling negotiations. They were initially supposed to begin on January 1st of this year; however the date was postponed two months after fiscal cliff negotiations were resolved. The goal of Sequestration is to help decrease the current federal budget deficit which has been around $1 trillion annually in recent years.
One may argue that a reduction in federal spending is needed in order to make sure that our national debt does not spiral out of control, however it appears the across the board cuts could have been allocated differently in order to prevent the economy from slowing down. The CBO (Congressional Budget Office) estimates that the Sequester may cause the loss of roughly 700,000 jobs as well as a reduction of GDP (Gross Domestic Product) growth by .6%.
Depending on which channel you tune into, you will hear that one party or the other is to blame for how negotiations turned out. One thing is for certain; both sides had nearly two years to come up with a plan to make spending cuts in areas that are expendable. Unfortunately, as has been the case in recent times, a compromise was not reached.
Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.