Can we live with the budget 'sequester'? Yes, but it’s better if we don’t.
Cuts would be 'across the board'
Back to the cuts: The 2011 law calls for cuts equaling about $100 billion a year, centered mostly in the discretionary portion of the federal budget. This means that some of the programs most important to Americans from day to day – Social Security, Medicaid, food stamps, and more – would not be affected. Medicare, another broad-reaching program, could see spending cuts of 2 percent under the law.
Beyond that, the cuts would essentially be "across the board," which would translate into a roughly 8 percent cut in each nondefense discretionary program next year, including air-traffic control and food-safety inspections. Military programs would face 9 percent cuts.
So there would be $100 billion in cuts each year, but compared with what benchmark of future spending? That money would be subtracted from a "baseline" that assumes federal spending grows at the rate of inflation each year.
These cuts, by themselves, aren't the kind of thing that would normally throw the economy into recession. The economy is growing at a current pace of about 2 percent a year, and $100 billion represents 0.6 percent of a year's GDP.
Still, the problem at this particular time is that the sequester is just part of a larger "fiscal cliff," which includes scheduled tax hikes next year as well. Taken together, the impact would be enough to cause a new recession unless Congress acts to reduce the cliff, forecasters say.
That's why economists generally expect Congress to take action – whether it comes late this year or as a retroactive maneuver, reducing the spending cuts and tax hikes early in the new year, after they have already started to take effect. The longer policymakers wait, however, the more the cliff's feared or real impacts could pinch economic growth.