I was going to call this “Waiting for the Furlough Axe to Fall”, but that draws too much attention to the 14 days without pay that I expect to take between mid-June and the end of September. What we are forgetting is that the Budget Control Act of 2011 lasts for 10 years, so barring amendment or repeal of the law, I expect sequestration to have an impact on government spending through the end of September 2022.
Here are my assumptions for how things will go over the next few years:
1. Items that are protected from sequestration, such as Social Security, food stamps, and Medicare/Medicaid will continue to be protected, though there is likely to be a change to how inflation is calculated to reduce the growth in Social Security payments. Payments to providers for Medicare/Medicaid are likely to be reduced. There may be tightening of restrictions to qualify for food stamps/TANF as well as greater enforcement efforts. States do have the option of using different income levels to qualify for benefits than what the federal government publishes.
2. We will have a drawdown of military forces, as happens every 20 years or so. This will have several outcomes, such as cancellation of weapons programs and the offer of separation incentives for military and civilian personnel. More money will need to be provided for repairing and maintaining military equipment at the expense of new systems. Offering separation/retirement incentives just shifts costs to another account, though the cost is less than having the person remain employed full-time. The hiring freeze that is in place at DoD will remain in place for several years, with new hires requiring approval 2-3 levels above the hiring authority.
3. Further implementation of the Affordable Care Act (ACA, i.e. “Obamacare”) will put additional stress on Defense and other programs to find savings to offset the cost of the expansion of Medicaid. The federal government is supposed to pay for the ENTIRE cost of the Medicaid expansion for three years, with the states taking over a small protion of the cost after that. Right now, the main change is that people who contribute to a health savings account had their maximum contribution cut from $5000 to $2500. This cost someone who made a maximum contribution about $600 in extra state and federal taxes. Health care premiums have been going up in price in anticipation of implementation of the ACA, in part because the ACA requirese that at least 85% of premiums be spent on actual health care services, not adminsitration costs.
4. Non-defense federal programs will at best tread water. The emphasis will be maintaining or completing existing programs rather than undertaking new initiatives. Remember, in the first few years, all that is being cut is growth from the “baseline budget”. It’s in years 3 and later that more painful cuts will have to be made.
There was a lot of excitement over having to take 22 days of unpaid leave, an amount that has since been reduced to 14. I’d rather take unpaid leave than have to work the time with a 5.4% pay cut. Either way, I lose out on 5.4% of my salary, but at least furloughs allow me to maintain my hourly rate. I didn’t see this as the event that would have a major impact. I was looking at future years, although from the prism of my current job.
Ideally, agencies should be planning for FY14, which begins in October, and being more forthcoming about what they expect to happen well in advance of the beginning of the fiscal year. I would expect the number of support contractors to decline, but that might just be wishful thinking on my part. I can understand furloughing federal employees rather than contractors now because of the notification requirements under the WARN Act that would need to be met and the fact that not letting the contractors work as scheduled would put the contractor in a position to make a claim against the government for more than the money that would be saved. There should be plans being made now to reduce costs that will have an impact on both procurement and personnel.
For instance, the Army needs to find $50 billion in savings in FY13. Furloughing civilian employees for 22 days only gets them 10% of that amount because both military personnel and contractors are not subject to furlough. One step that the Secretary of the Army took was to defer depot maintenance on equipment for the rest of the year. Congress appropriated money to fund depot maintenance, much of which supports “reset”, which is fixing vehicles and equipment so that they are ready for the next deployment cycle. I expect upgrades of military housing to be deferred, though necessary repairs will be made.
Until you begin digging into the budget, it seems like it should be no big deal to cut 5% or 10% from the budget, even with protecting a sizable chunk of the budget from cuts. What we don’t see are the fixed costs of government. It isn’t as simple as saying, “Army, you can have 10% fewer people and systems.” Most of the costs are incurred in operations and sustainment, not research and development or production, in part because weapons systems can last for decades. How long have we had the Colt 1911 .45 caliber pistol? The B-52 bomber has been “extended” to last util something like 2042.
The need to generate savings in the “out years” may well hasten the reduction of the U.S. presence overseas, though it won’t be fast in the sense of deploying the Army to Iraq was. We have spent hundreds of billions building military bases in Iraq and Afghanistan that will be turned back to those countries.
I think that sequestration has the potential to have a far greater effect on the economy than the debt ceiling battles or the expected tax increases that were put into effect early this year could have for a simple reason: sequestration removes the stimulus that was passed early in Obama’s first term, although by a different route and at a different rate. I am not sure when that stimulus package is set to expire, but we do face the double whammy of sequestration and the end of that stimulus.