Wednesday, February 27, 2013

The Sequester

I think Washington is getting the message that the American public is tiring of all of these dramedies relating to budget/debt ceilings/etc.  However, while I have no unique insights, I do believe that they are going to let the sequester take place (for the record when using it as a noun, it's the sequester, when using it as a verb it's sequestration). 

However, I do expect a "grand compromise" to be announced sometime after 3/1 and before the 3/27 deadline required for a Continuing Resolution to keep the lights on in Washington.

The impact will be limited initially, but the impact of sequestration could be very real for some segments of the government.  Here is one minor example of the way a cut to federal funding impacts your bottom line.  The Federal Government created a program many years ago to promote the education of children with special needs.  This program, IDEA, currently serves over 500,000 students in the US.  When Congress created the program they promised to fund 40% of the local cost.  Today, they currently fund about 17% of those costs and while many have pushed for full funding that seems like a lofty goal in today's Congress.  So, that 17% of Federal Funding is now going to be subject to the sequester and instead of funding 17% of the cost of the program (when they promised to fund 40%) they will fund 16% of the program (a reduction of nearly $1 billion).  Costs for these programs are not declining, so the local burden for these programs will grow.  This takes money from other budget line items like instruction and materials or leads to higher property tax rates. 

I would argue that it's all coming from the same pool of money (my combined tax bill - state, federal, local) so whether the Federal government collects the tax or the local school collects the tax it makes little difference.  However, if you know a teacher that is laid off due to timing differences in revenue collection or if you are an employee fearing a furlough, this will seem very real to you.  The drag on the economy could be significant as people start curtailing spending "just in case" their job is in jeopardy.

If the consumer experiences a slowdown then we could slip back toward recession which I'll touch on in my next post.

So, in summary - the sequester happens, but expect a grand compromise on about 3/15 to keep the government going.  There will be some higher taxes, there will be some spending cuts and there will be some changes in the assumed growth rate of costs.

And now you can ignore the rest of the chatter on the news for the next 2 weeks.

Cheers!

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