Rather, this sequester is the latest example of US political dysfunction and describes how billions of dollars in automatic budget cuts are set to hit the world’s largest economy in the next few months. Today we will focus our discussion on the sequester by looking at its origin
Birth of the sequester
Remember back in December when the fiscal cliff the big threat to the US economy and global markets? Well, a significant component of the cliff was US$1.2 trillion in across-the-board spending cuts.
The cliff deal reached in early January called for tax rates go up on high income earners in order to bring in an estimated US$600 billion in additional government revenue over the next decade.
However, the US$1.2 trillion in cuts that were meant to come into effect on January 1 were merely delayed by two months rather that rescinded completely. The cuts would amount to approximately US$109 billion a year through to 2021.
The cuts were also known by another term – sequestration. To remind everyone, sequestration was borne out of the August 2011 deal among US lawmakers to reduce the budget deficit and avert breaching the debt ceiling.
The sequester was designed to be so bad for the economy that it would force lawmakers to come up with a more comprehensive, and less draconian deal, before January 1, to reduce government debt.
However, the nation’s political dysfunction resulted in a failure to reach a comprehensive deal by that date. Instead, lawmakers scrambled to delay sequestration by just two months, and as expected, they failed again to reach a comprehensive deal. So, on March 1, sequestration came into effect and the US now enters a period of economic uncertainty.
Tomorrow we will examine the possible impacts of the sequester on the US economy.