Automatic cuts of $1.2 trillion in U.S. federal government spending over the next ten years went into effect on March 1. Robert Kahn, CFR's Steven A. Tananbaum Senior Fellow for International Economics, highlights three things to know about the so-called "sequester":
A Drag on the Economy – Economists estimate that the sequester will reduce U.S. economic growth by up to 0.75 percent this year and could cost as many as 750,000 jobs by the end of 2014, Kahn says. "This tells us that the sequester is a significant drag on the economy, but its unlikely to cause a new recession." The impact of the sequester will become more disruptive over time, he says.
The Blow May Be Softened – "As the political and economic costs mount, pressure on Congress and the administration will intensify to negotiate changes," Kahn says. The sequester may be amended or softened by extending deadlines, providing government departments with more discretion, or through a standalone bill as part of next year's budget process.
No Long-Term Solution – The sequester does not address the long-term drivers of the U.S. deficit, Kahn emphasizes. "With the sequester, we have now cut the budget enough to stabilize the debt until about the middle of the decade, but after that deficits will begin to rise sharply as an aging population drives medical and retirement costs higher and rising interest rates boost debt service," he says.
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