U.S. Markets open in 1 hr 51 mins

IMF’s Sequester Lamentation Should Be Read With Some Skepticism

Yahoo! Finance
The Exchange

By Gordon Gray

Amidst the cacophony surrounding immigration reform, myriad scandals, and now Syria, budget news has been appropriately slow of late. But out of this din the chirping of the IMF can be heard, warning about the ills of recent American fiscal consolidation.

Many observers have been quick to piggy-back on the IMF’s lament and decry the $85 billion sequester’s effect on the economy. This criticism should be taken with some skepticism. First, the IMF’s projections include the effects of recent tax increases as well as the sequester. Second, of the $85 billion in funding reductions from the sequester, only about $42 billion in actual spending will be cut in FY2013. This reflects the difference between Budget Authority (BA) and Outlays (OT). The 2013 sequester will reduce BA by $85 billion – but will only cut money going out the door and thus into the economy by $42 billion. This is commonly confused or glossed-over point of budgeting, but it clearly matters.

This is not to say that the sequester is particularly good policy. It isn’t. In FY2013, it’s a blunt, indiscriminant approach to budgeting.

But for FY2014, the story changes. Under the Budget Control Act (as amended) in FY2013, the sequester would apply uniform percentage reductions to discretionary programs, projects, and activities (PPAs). This mechanism precluded agencies and appropriators from prioritizing federal spending and treated every dollar of federal spending essentially the same.

However, informed observers will understand that not every dollar expended by the federal government is equally well-spent. In FY2014, the rules change and throw out the uniform cancelation of spending resources. Instead, spending caps put in place by the BCA are lowered. A federal spending boon it isn’t but it doesn’t establish a framework whereby policymakers can prioritize programmatic spending, both on the basis of its effect on current services and the extent to which it may improve economic growth in the future.

For this critical reason, the scheduled spending cuts in 2014 should not be considered in the same fashion as those undertaken in 2013. These are critical distinctions, that alas, sometimes get lost in the noise.

Gordon Gray currently serves as the Director of Fiscal Policy at the American Action Forum (AAF). Prior to joining AAF, Gray served as senior policy advisor to Senator Rob Portman and as policy director on the Senator's campaign. Gray has also worked for the Senate Budget Committee as professional staff and before that was deputy director of domestic and economic policy for Senator John McCain's presidential campaign. Gray also spent several years with the American Enterprise Institute.