Sequester’s Dirty Secret: It Doesn’t Fix the Debt
Business + Economy

Sequester’s Dirty Secret: It Doesn’t Fix the Debt

iStockphoto/The Fiscal Times

The smart money is realizing a major flaw in the budget sequester—it doesn’t actually fix the debt problem.

So much focus has been on the potential economic damage caused by the $85 billion in automatic cuts slated to begin next week. The Pentagon warns about civilian employees swallowing a 20 percent pay cut and untrained soldiers. Airport security lines are supposed to get more tedious. Food safety inspections would stop. The list of terrifying cutbacks increasingly gets highlighted by the Obama administration.

But for all that supposed sacrifice, the $1.2 trillion of sequestration cuts over the next decade do little to improve the government’s balance sheet.

“We project that debt held by the public will reach 76 percent of GDP this year, the largest percentage since 1950,” Congressional Budget Office Director Douglas Elmendorf testified to Congress last week. “And, under current laws, we project that debt in 2023 will be 77 percent of GDP—far higher than the 39 percent average seen over the past 40 years—and will be on an upward path.”

The $1.5 trillion in additional savings being requested by President Obama from spending cuts and more tax revenues would still leave that debt-to-GDP ratio at a historically high 70 percent.

Erskine Bowles and Alan Simpson weighed in on Tuesday with a call for more in deficit reduction. And on Wednesday, the nonpartisan Committee for Economic Development also advised doing more to tackle the debt in an open letter to Obama and Congress.

“The most important point to recognize here is that the sequester is unlikely to achieve sustainable progress to reducing our debt,” said Roger Ferguson, Jr., co-chairman of the CED, CEO of TIAA-CREF, and a member of Obama’s disbanded Council on Jobs and Competitiveness.

The CED advised the government put that ratio on a “continuous downward path” that reaches a maximum of 60 percent in the next decade. Back of the envelope calculations based on CBO numbers suggest that would mean roughly $4 trillion in savings.

Despite the political gridlock, the CED advises an alternative to the sequester that is divided between spending cuts and revenue increases. It would then establish a two-year budget framework to reform entitlements and the tax code.