(Released on 3/10/13)
For the last two months, taxpayers heard time and time again that the “sky is falling, the sky is falling” yet, however, with the passage of the sequester deadline last Friday, we have learned that although the spending cuts went into effect, the impact will be dragged out over the remaining months of the current fiscal year which ends on September 30.
As a result of the across-the-board sequester, federal spending will shrink by $85 billion this year and if nothing is done to alter the current plan, the total reduction in spending will amount to $1.2 trillion over the next ten years. Although anything that is a “trillion” dollars sounds like a heck of a lot of money, this represents only about 2.4% of the federal budget and represents only about one-half of one percent of the Gross Domestic Product (GDP). The cuts are about evenly between defense and non-defense discretionary expenditures. As a result, those areas of the country, like Hawaii, where there is a high concentration of federal employees, both civilian and military, will be the hardest hit under sequestration.
While the President has characterized sequestration as “dumb” because the cuts are imposed “across-the-board” with every affected program imposed with the same percentage of spending reduction, that strategy is a product of the unwillingness to compromise on the part of both parties. What is even more confusing is that no work seems to have been done to prepare for a paring back of federal spending as the assumption was and still may be that an increase in taxes is the appropriate alternative. Since the possibility of increasing the tax burden was always there down to the deadline of sequestration, no one talked seriously about making “appropriate” cuts in spending, setting priorities for federal programs that could be deemed of a health and safety nature. More important, none of the reductions in spending will affect mandatory programs like Social Security, Medicare, and Medicaid which, as noted in an earlier Commentary, comprise the bulk of federal expenditures.
For nearly 30 years prior to 2008, these mandatory spending programs represented about 10% of Gross Domestic Product (GDP). Then they took a leap in 2009 rising to 15% of GDP, but fell back to their current level of 13.1 % of GDP. However, if no reductions are adopted, spending on these “mandatory” programs is expected to rise to more than 14% of GDP by the year 2023. Only in the last few days has the President announced that he is willing to look at some of these programs and begin to pare back on the amount spent on these programs. While cutting spending on these three mandatory programs was a strategy used to drive a wedge into the efforts to stop sequestration and garner support for tax increases, it has become increasingly apparent to all taxpayers that something needs to be done if the United States is to avoid the fiscal disasters encountered during the past year in Europe.
While many bemoan and will continue to decry the reduction in federal expenditures and concerted efforts to bring down the outstanding debt of more than $16 trillion, the real question is when were elected officials going to get around to reducing the imbalance between what the federal government was taking in as revenues and what it was spending out the door? Although it seemed that taxpayers were able to get more and more services and programs over the past 20 or 30 years, what they did not know is that much of the money used to expand the federal government, including financing the conflicts in the Middle East, was being paid for with borrowed money. The long and short of it was that Americans were enjoying the “good life” on borrowed funds much like a family that runs up debt on the credit cards only to find out that they owe more than they can reasonably afford to pay back to their creditors.
The same can be said of state and local governments in Hawaii where lawmakers were forced to cut spending and raise taxes and fees at the height of the recent economic downturn and they are now back at the trough looking for more money to “restore” state and county government to its inflated size prior to the economic downturn. The continual whine heard at the legislature brought to the table by department heads is that they “lost” X number of positions so they are short staffed and they need this fee or tax to help restore the personnel that were lost in the last downturn.
Instead of taking the opportunity to right-size government, state and local officials also want to just “kick the can down the road” and avoid reducing government spending.