Numerous articles are out today saying that the Sequester cuts might actually cost the US money rather than saving money. I just read an Article by Andy Sullivan of Reuters that explains how the Sequester really won’t save the country $85 Billion. That is the number that keeps circulating. However, that is a BUDGETED amount. The amount of actual spending that will be cut in the current fiscal year is only $43 billion. This is because many budgeted items take years to actually be finished (like warships and planes).
Many economists are saying that the effect of this on the economy will be minimal. However, if the economy does slows its growth rate, that means less income tax collected by the IRS. Current estimate is that this will amount to $6 billion lost revenue, if the economy slows as a result of the Sequester. In addition, outlays for unemployment, food stamps, and other automatic entitlements will rise. These are beyond the reach of the sequester – they are already law, and go into effect when need tests are met.
Fewer IRS agents and Medicare watchdogs means more cheating, and more lost revenue.
The ripple or snowball effect could also be large. Suppose a defense contractor faces lost revenue. They might cut back even further than needed to just offset the revenue loss, to ensure they don’t lose money. If more areas of production are shut down, that could mean long-term job loss, and eventual loss of GDP to overseas firms. This could mean even more unemployment claims, lost tax revenue, etc. States will be losing grants, projects, educational aid too, so the cuts would also mean reductions of personnel at the State employment level.
Many defense industry experts and economists are saying the Sequester will be fixed within 45-90 days. That both sides are just hoping the political fallout hurts the other side more, and then they can both sit down and fix it.
It will be very interesting to see what the actual savings of this manufactured crisis turn out to be!