As headlines announce the sequester, many people are wondering what the budget cuts will mean for the economy — and for their own finances. Here, we address several of the key questions that may be on your mind.
What is the sequester?
The sequester is a package of mandatory federal spending cuts that took effect on March 1. It will result in a macro-level spending reduction of $85 billion this year, with additional cuts in subsequent years. These cuts will affect virtually every program that receives federal funding, including national defense, education and law enforcement programs.
What will it mean for the economy?
While $85 billion sounds like a lot of money to the average consumer, it is a relatively small portion of the overall federal budget. Indeed, unlike the tax increases that recently took effect, the spending cuts should have a relatively muted impact on the economy.
The best estimates at this point suggest a drag on economic growth of about 0.5 percent of gross domestic product (GDP). With current growth rates estimated at around 1.5 percent to 2.5 percent for the year, a 0.5-percent drag represents a real headwind, but not one that would tip the economy into a recession.
Further, while the spending cuts will undoubtedly have an initial impact, they will be a one-time event. The economy will take a hit in the first quarter and possibly the second, as it did from the tax hikes at the start of the year, but then carry on. Plus, even as federal spending declines, state and government spending is expected to start to recover, which could offset much of the damage.
What will it mean for you?
Government spending cuts can have real consequences for the average citizen, especially for federal employees, members of the military and teachers. Airport personnel may be furloughed, resulting in delays for passengers. National parks may slash their budgets, affecting visitor experiences. As the cuts are slated for nearly every federal program, they stand to touch your life in some way, big or small.
When it comes to your financial bottom line and your tax bill, however, the sequester isn’t likely to have a significant effect.
The final word
The upshot is that, unlike the fiscal cliff situation at the end of last year, the political incentives favor letting the sequester hit.
Fortunately, also unlike last year, the damage is likely to be moderate rather than severe. Many believe that cuts like these have to happen, and the developing consensus that we should let them happen now may actually be a long-term positive for the economy, despite the short-term pain.
Kevin Dick is a financial consultant at Kevin Dick Investment Management Group, 620 E. Highway 260. He offers securities as a registered investment adviser of Commonwealth Financial Network. For more information, call (928) 474-4350 or e-mail him at Kevin@kevindickimg.com.