Short-Term Flexibility Won't Help Long-Term Impact of Sequestration

President Obama signed legislation Tuesday to keep the government funded through the end of September and to give greater flexibility to a handful of agencies as they roll out the mandated across-the-board spending cuts known as sequestration.

Still, this flexibility does not change the dollars and cents of the equation, nor will it blunt the long-term economic impact. “I think, honestly, the overall macroeconomic impact and near-term prospects aren’t going to be that dramatic,” said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and president of the American Action Forum, a conservative think tank. “You might do a better job of delivering government services, and people care about that.”

The Defense Department, for instance, will have more control over over the cuts that need to be made. Similarly, programs involving embassy security, meat inspection, and infant nutrition will not see the same level of reductions, or any at all, for the rest of this fiscal year.

Such news has prompted the Defense Department to postpone furloughs for civilian employees for roughly two weeks, according to the Press Secretary George Little.  “We have not made any decisions on whether or not the total number of planned furlough days for fiscal year 2013 will change as a result of this delay,” he said. “We believe the delay is a responsible step."

The continuing resolution shifted funding within a select group of agencies from a handful of long-term projects to ones with a more immediate time frame, budget analysts say. Ultimately, this is not dramatic enough to alter the dire macroeconomic forecasts surrounding sequestration—namely, that economic growth could slow by as much as 0.6 percentage points in 2013 and cost the economy 700,000 jobs between now and 2014. Such job losses could push the unemployment rate up by a quarter-point, according to Macroeconomic Advisers, a forecasting firm.

Senate Appropriations Committee Chairwoman Barbara Mikulski, D-Md., was quick to point out last week that the funding bills were not any salve for sequestration. “That's part of the charm offensive that's going on,” she said about the president’s recent outreach to Capitol Hill. “Sequester needs a balanced solution and we will be listening and awaiting their ideas.”

The only way now to undo the across-the-board spending cuts is to change the Budget Control Act that put them in place, and there seems to be little agreement between the two parties on the best way to do that.

The flexibility that the funding bill offers helps ease some of the pain for a small handful of agencies like the Defense Department, but it does not change the indiscriminate nature of the spending cuts, said Sean West, a director at the Eurasia Group, a firm that forecasts political risk. “It certainly delays some of the immediate impact, but we are talking small numbers in a large economy,” he said.

The chief upside of the flexibility only becomes apparent if Congress and the president can reach a larger budget deal this spring, a possibility that seems fairly remote given the ideological gulf between the Republicans and Democrats.  

“If there is some sort of deal to modify the Budget Control Act later this year,” West said, “the outlay delay opens the possibility that this spending is not actually taken out of the economy.”