Finance & Enjoyment Blog

The Fiscal Cliff: Sequestration


We discussed the big ticket item of the Bush Tax Cuts in the last blog.  The next biggest item is sequestration. Until the Budget Control Act was signed in August, 2011 most people had probably not heard of the word before. The Wikipedia definition of sequestration is “A U.S. legal procedure in which automatic spending cuts are triggered, notably implemented in the Budget Control Act of 2011.” This Act established the so called “Super Committee, which was tasked with putting together a bipartisan piece of legislation to reduce the deficit. The committee was to have twelve members, six Republicans and six Democrats. Their goal was to come up with $1.5 trillion of spending cuts over the next 10 years. If no agreement was reached by a deadline, across the board cuts would take effect beginning in 2013, to be spread over the next nine years.   Mandatory and discretionary spending would be hit equally each year, with certain exemptions such as Social Security, Medicaid and military pay.
In 2013, the expected cuts are $109.3 billion dollars. While this may (i.e. government contractor) or may not impact you directly (i.e. CPA), $109.3 billion in cuts to government spending is not a drop in the bucket. If the fiscal year 2011 federal spending amount is $3.6 trillion, $109 billion in cuts is about a 3% cut to government spending. If GDP was roughly $15 trillion, that same $109 billion cut is roughly a .7% hit to GDP. For an economy currently growing at 2%, this cut combined with the Bush tax cuts and the expiration of the payroll tax holiday, could very well tip the US back into recession in the first quarter of 2013.
THE CBO (Congressional Budget Office) has presented a graph that shows the impact to a number of measurements if all the cuts and tax provisions change as currently set versus Congress extending most cuts and preventing sequestration from happening. The three key numbers that most people will care about are the GDP growth, the unemployment rate, and our public debt. Economic growth is projected to be a negative .5% for 2013, assuming all cuts and tax provisions change as planned. Unemployment will be 9.1% versus 8.0% in the same scenario while our debt will be 58% (current law stays in place) versus 90% (Congress takes action and makes changes). 
We do not know what Congress will do, or even if they can do anything, given the current gridlock in Congress.  We will continue to monitor what goes on with our elections and what happens in a lame-duck session of Congress. Keep coming back to our website and look for special e-mails that we will be sending to clients and friends about any deals on these issues. As always, please call with questions or concerns about the potential impact on you.  

Posted in Successful Practice Management » Your Financial House » Retirement and Exit Strategies » Rules and Regulations »

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