CBO: Sequester Repeal Would Raise Deficits, Lower Growth

On Tuesday, the Congressional Budget Office (CBO) responded to a request from Senator Bernie Sanders (I-VT) to analyze the macroeconomic effects of repealing the sequestration budget caps on discretionary spending. CBO Director Keith Hall wrote in a letter that repealing the sequester could increase GDP and employment. However, any short term gain would come at a long term price: the agency also said that repealing sequester caps would increase deficits and result in lower output and income than projected under current law.

Sanders, the ranking member on the Senate Budget Committee, commented on CBO's findings in a statement: "These arbitrary sequestration caps have never made any sense, and now we see even more clearly the implications for our workers. ... If Congress does not act to end sequestration, we're looking at the loss of as many as 1.4 million jobs over the next two years."

However, the Senator's statement ignores several realities about the CBO's projections that should be considered.

  • Economic gains from repealing sequester are uncertain. CBO projects that undoing the spending caps would increase GDP by anywhere from 0.2 to 1 percent over the next two years, and employment by the equivalent of 300,000 to 1.4 million full-time jobs. That is a very wide and highly variable range, of which Senator Sanders only cited the most optimistic ends.
  • The assumptions behind CBO's projections matter. Namely, those that directly correlate increased government spending with greater economic growth. By definition, GDP -- which is the product of consumption, investment, government spending, and net exports -- will increase any time the government spends more money. However, GDP is not the only measure of an economy's strength, and whether public spending actually stimulates the economy is the subject of continued debate among economists.
  • The long term economic implications would reverse any immediate growth. In CBO's own words: "Although eliminating the reductions to the spending caps for fiscal years 2016 and 2017 would increase output and employment over the next few years, the resulting increases in federal deficits would, in the longer term, make the nation's output and income lower than they would be otherwise." (Italics added for emphasis.)
  • Repealing the caps would reduce private investment. Without spending caps in place, federal spending would increase by about $159 billion over the next three years. That would lead to higher deficits that "would start to gradually reduce -- or crowd out -- private investment in productive capital because the portion of people's savings used to buy government securities would not be available to finance private investment."

The economic benefits of repealing sequestration are uncertain, at best, and would likely be offset by the long-term losses that higher deficits would cause.