Daily Times

On Friday March 1, 2013, President Barack Obama inked into law the directive that triggered the sequester that was a topic of extensive debate in the US for the past several weeks.

The sequestration, commonly known as the sequester, enacted by the 2011 Budget Control Act, refers to the cuts in federal agencies’ planned budget increases. The cuts were supposed to commence on the last New Year’s Eve but were delayed for two months by the American Taxpayer Relief Act. During the fiscal year 2013, the spending cuts will be around 85 billion dollars. Spanning over the next 10 years, the sequester will enable the reduction of approximately $995 billion in planned spending. Together with the additional amount of $228 billion in interest savings, the sequester will lead to a total of approximately 1.2 trillion dollars in debt reduction.

The budgets cuts will be equally split between defence and non-defence spendings. However, a few significant programmes like federal pay, social security and veterans’ benefits will be spared the axe. The sequester will reduce economic growth in the current fiscal year estimably by 0.6 percent. The economy will face serious employment problems with the cuts threatening both the retention of current jobs and the creation of new ones. Almost every department of government will be required to slash its overall budget by five percent, a move that will inevitably result in scores of job suspensions and consequential disruptions in government functions. Government officials are already warning that the sequester will be extremely destructive for the US economy and its national security.

The sequester will also affect the US’s armed forces since it will cut down the military budget by eight percent. Various branches of the military will be made to endure a cumulative spending cut of $500 billion over the next 10 years. The consequences of the cuts became visible even before the sequester came into effect. The US Navy chose to hold the deployment of another carrier in the Persian Gulf region, and US military has delayed rotation of combat units. Maintenance, training and procurement plans have also been put on hold.

President Obama blamed the Republicans for the current fiscal calamity claiming that the GOP’s main problem is its resentment towards any kind of extra taxation of the rich. The administration is also running a campaign that seeks to focus the plight of middle class families in the face of the budget cuts. The republicans, on the other hand, are stubbornly maintaining that government spending has spiralled out of control. Imposition of new taxes will only be a waste of money until the spending issue is resolved.

Viewed in retrospect, it was persistent Republican stance on spending cuts during the debt-ceiling crisis of 2011 that resulted in the Budget Control Act of 2011 which, after the failure of the Joint Select Committee on Deficit Reduction, automatically enacted the sequestration.

The debt ceiling used to be a symbolic cap that provided the Congress minority with an opportunity to debate the fiscal policies of the majority before increasing the limit. However, after a spectacular congressional victory in 2010, the Republicans decided to use the debt-ceiling as a leverage in order to squeeze deep spending cuts out of the democrats while keeping the tax structure intact. They even threatened to push the US government into default unless Obama ceded to their demands.

It is almost maniacal to suggest that the Republicans were unaware of the consequences of a US default for the nation and the rest of the world; however, they argued that the debt had become a huge burden and extreme measures were needed to prevent America from going bankrupt. The fiscal threat posed by the Republicans was this: either Obama acceded to cut substantial non-defence spending or face default. Obama acquiesced to a few Republican demands but they insisted for more so the White House suggested an across-the-board spending cut of 1.2 trillion dollars over the next 10 years that would automatically come into effect unless the two parties agreed on a viable plan. This was the origin of the sequester.

Towards the end of February, as the sequestration deadline approached, the Republicans found themselves in a dilemma. Democrats had already got their tax raise in January. Republicans believed that it was time to cut spending. However, the democrats offered them no such proposal leaving them to choose between two extreme options: no cuts at all or the automatic enactment of the sequester that will result in enormous spending cuts. The Republicans chose the latter and let the sequester come into effect. Democrats can now conveniently claim that the sequester budget cuts are the direct result of Republican stubbornness and their refusal to vote against it.

Most American believe that they will be personally affected by the sequester. They also believe that Republican congressmen are responsible for the drastic budget cuts. For the sake of fairness, it should be kept in mind that the sequester was originally proposed by the White house. However, it is also a fact that the proposal was manufactured in order to resolve the debt-ceiling crisis deliberately created by Republican congressmen. It is, however, too early to predict the actual impact of budget cuts, and the party that will ultimately face its political consequences.

In Washington, another fiscal showdown lurks just around the corner. By March 27, if the congress fails to pass a continuing resolution for funding, the US government will be shut down. Strictly speaking, a shutdown is not as bad a debt default but its economic and political fallouts will be enormous that will be felt not only in the US but also around the globe.

The writer is an investment banker and a freelance columnist for various publications. He can be reached at syedatifshamim@hotmail.com