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Portfolio > Economy & Markets

As Sequester Kicks In, Here’s What Happens Next

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With the Senate rejecting Thursday both the last-minute Democratic and Republican proposals, the $85 billion in sequester cuts kicked in on Friday. President Barack Obama stated Thursday that the Senate, by failing to accept either measure, “voted to let the entire burden of deficit reduction fall squarely on the middle class.”

“Republicans in the Senate faced a choice about how to grow our economy and reduce our deficit,” Obama said. “And instead of closing a single tax loophole that benefits the well-off and well-connected, they chose to cut vital services for children, seniors, our men and women in uniform and their families.”

While $85 billion in cuts will take effect in the remaining seven months of this fiscal year, the across-the-board reductions will total $1.2 trillion over nine years.

Obama said that he planned to meet Friday with leaders from both parties “to discuss a path forward.” As a nation, he said, “we can’t keep lurching from one manufactured crisis to another. Middle-class families can’t keep paying the price for dysfunction in Washington. We can build on the over $2.5 trillion in deficit reduction we’ve already achieved, but doing so will require Republicans to compromise. That’s how our democracy works, and that’s what the American people deserve.”

What happens now and in the months to come? According to The Wall Street Journal, the timeline for cuts and other measures will look like this:

  • March 1: The White House is expected to alert agencies their budgets have been cut. Agencies will begin notifying employees, contractors and states that spending will contract over the next seven months.
  • Early to mid-March: Furlough notices will begin being sent by agencies to many of their employees, warning that unpaid leave could begin in 30 more days.
  • March 27: Unrelated to the sequester, funding for some federal programs and agencies expires. If an agreement isn’t reached, a partial government shutdown could ensue.
  • Early to mid-April: If a shutdown is averted, many agencies will begin unpaid leave for employees, typically one day per week or one day every other week. The cuts’ impact may become more visible, possibly affecting places like airports.
  • Sept. 30: The federal budget year ends, meaning the cuts have to be accounted for by this time.
  • Oct. 1: The next federal budget year begins, triggering a second year of sequester cuts.

Joe Lieber of Washington Analysis says that Congress will most likely wait until after the March 27 deadline for extending the continuing resolution (CR) now funding the government before returning to address the sequester. “Disagreement over how to ‘pay for’ a delay—with tax increases, spending cuts or some combination of the two—will continue to forestall a near-term agreement,” he said.

Lieber says to brace for “mass furloughs” beginning in April. The mass furloughs will pressure Congress “to reach agreement on how to delay the policy once again,” Lieber says. “While this will likely occur sometime after Congress addresses the CR, just when that takes place depends on how acutely the impact is felt.”

Having made little progress in coming up with the requisite $1.2 trillion in offsets for a wholesale cancellation of the sequester, Congress will settle “upon another short-term, stopgap measure,” Lieber predicts. “Such delays could very well become the new normal as this year’s highly partisan Congress continues to clash over fundamental differences on tax and spending policy. Investors should expect ongoing uncertainty and budget constraints as Congress chips away at the sequester it created for itself a year and half ago.”


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