Sequestration officially took effect March 1, but many are wondering what exactly it is and what it means for them.
What Is Sequestration?
Sequestration is a fancy term for federal budget cuts. In this year’s case, the automatic sequestration that went into effect last week involves $1.2 trillion in deficit reduction that will be phased in during the next 10 years, with about $85 billion in spending cuts in 2013.
The sequester, which was included in the 2011 Budget Control Act, was designed to motivate lawmakers to create a 10-year budget that cut $1.5 trillion in spending. The thinking was that the cuts would be so undesirable that it would force politicians to reach an agreement before the sequester took effect. Obviously that didn’t happen.
Now, whittling down the federal outlay doesn’t sound so bad – our country’s economic stability certainly depends on it – but the problem is that these reductions are across the board and aren’t strategic.
Here’s an illustrative breakdown, courtesy of the Pew Fiscal Analysis Initiative:
Note: The data in this chart is from Oct. 2011, predating a few changes that were made after the ATRA was signed into law in January 2013.
Who Will Sequestration Affect?
It seems that everyone will be affected by the sequestration but not to the same extent. The Washington Post’s Philip Rucker summed it up quite eloquently:
“[T]he sequester is really like a tornado, scattershot in its course. It would strike some communities and largely bypass others, cutting across class, politics and geography.”
But unlike a tornado, whose damage is instantly felt, any negative results of the sequestration will accumulate over time instead of causing instant heartache because the decrease in spending will be slowly rolled out.
Most expect that defense contractors and government contractors in general will be among the hardest-hit segments.
But it’s not just businesses in those industries that would be affected. Communities that house these contractors are likely to feel the pain, too.
Rucker reports that many private business owners in Kileen, Texas, are worried about the trickle-down impact that the furloughs of Fort Hood’s workers would have on the local restaurant, retail and real estate markets. Under the automatic cuts, around 6,000 people would work one less day a week, cutting their pay by 20% during that time.
Kileen is not the only community concerned. There are similar reports coming out of Belleville, Illinois, which is near Scott Air Force Base, the region’s biggest employer.
Others also expect Virginia and Maryland to take sequestration hard, with their close proximity to D.C. and heavy population of government contractors. Pew’s Ann Stauffer estimates 20 percent of the state’s economic activity in Virginia and Maryland comes from federal contracts and salaries.
To see how your state could be affected, look at Pew’s interactive map, The Impact of the Fiscal Cliff on the States: Sequestration.
Should Private Business Owners Worry?
We’ve never had a sequester of this magnitude before, so there’s really no way of knowing how this will turn out. As reporters Chris Cillizza and Sean Sullivan put it:
“No one who signed off on sequestration in 2011 thought it would ever come to pass and, as a result, there was little long-range thinking about what might happen if it did. Now that the impossible is on the verge of happening, no one really knows what comes next.”
On a national level, here is what experts are predicting.
The Congressional Budget Office, a nonpartisan analysis agency, forecasts that the sequestration will decrease economic growth in 2013.
Macroeconomic Advisers also estimate that the sequestration will reduce growth by .6 percentage point in 2013. In addition, they predict that the reduction in spending would cost about 700,000 jobs by the end of 2014, with the sequester adversely affecting the unemployment rate for several years.
But then on the flip side, investors don’t seem too worried. The evidence? The Dow Jones hit a record high 14,283 points on Monday, the second business day after the automatic spending cuts started.
Depending on your business, where it’s located, and who your customer base is, your company might not feel the sequester pains. Even if it does, you won’t know how it will pan out until later this year, since the cuts are being slowly rolled out.
Should private business owners be concerned? It seems to be a toss-up based on a myriad of factors.
Bottom Line
We’ve never been down this road before, so there’s really no way of knowing how this will turn out. Uncertainty is king.
What we do know is that the impact of sequestration won’t be felt immediately and its victims will be scattered. Hopefully those in D.C. will have worked out a new budget before the decrease in spending largely affects any communities.
This also adds one more layer to the overall uncertainty that business owners face. The risks associated with owning and operating a privately held company are greater today than ever before. If you have reached the tipping point in your risk vs. reward equation, it is probably time you develop an exit plan.
Issues like sequestration seem to be raising their ugly heads more and more frequently in the U.S. than ever before. If you would like to learn more about developing a plan to protect your most important asset, you should access the Generational Equity library of whitepapers. Reading them will help you get started towards protecting your future.
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