The decrease in this year’s deficit resulted not so much from the modest sequestration spending cuts, but from increases in taxes—including a return to the old level in payroll taxes and higher income taxes. According to a 2010 study by former Obama advisor Christina Romer, co-authored with David Romer, the economy feels the negative impact of tax increases with a one-year lag, and then gross domestic product falls by $1.10 for every dollar increase in taxes. Reversing sequestration and returning spending to the higher trajectory would mean even higher debt and, consequently, higher taxes in the future. As was the case with the stimulus, it’s uncertain that increasing spending would produce much of a benefit, but there would be a guaranteed cost of even lower growth in the future—and far fewer policy options in the event of another crisis.
In a study co-authored with Harvard economist Robert Barro, my Mercatus Center colleague Veronique de Rugy found that, for a given level of taxes, cutting defense spending reduces the need for public borrowing in the future, They estimated that, over five years, each $1.00 reduction of defense spending would generate $1.30 of extra private spending as GDP grows. A similar “multiplier” effect would appear with spending cuts in other government programs; it is not unique to defense.
Despite sequestration, federal spending totals are still set to grow, from $3.5 trillion in 2013 and 22 percent of GDP, to $5.7 trillion and 22.2 percent of GDP, according to OMB’s latest figures. This growth is largely driven by mandatory spending programs, like Social Security, Medicaid and Medicare, and effectively mandatory interest payments (because a default on debt is not an option to be considered) which currently consume more than 66 percent of the federal budget. By 2023, 76 cents of every dollar of federal spending will be consumed by mandatory spending and interest payments, even if government maintains the spending cuts from sequestration.
Sequestration is therefore no more than a very small first step in addressing the nation’s fiscal problems, because legislators limited it to cuts in discretionary spending. The federal fiscal situation cannot improve as long as mandatory spending is excluded from reform.
Modest sequestration achieved at least two things: It put a brake on the spending growth rate, and it demonstrated that spending cuts were possible. The next round of spending cuts might be a little harder, but another round of broad-based cuts is the most likely next step on the path to fiscal sustainability.