CBO Director: Done Right, Sequester Relief Can Bolster Economy

Congressional Budget Office (CBO) Director Keith Hall wrote in a letter to Congress yesterday that increasing discretionary spending to the original Budget Control Act cap levels would increase real gross domestic product (GDP) by 0.4 percent and generate roughly 500,000 full-time equivalent jobs next year. However, Hall also warned of economic damage in the long run if additional spending was put on the nation’s credit card.

“Although eliminating the reductions to the spending caps for fiscal years 2016 and 2017 would increase output and employment over the next few years,” wrote Hall, “the resulting increases in federal deficits would, in the longer term, make the nation’s output and income lower than they would be otherwise.”

Remember, the sequester-level caps were never meant to take effect; rather, they were designed to encourage lawmakers in both parties to compromise on a different, comprehensive deficit reduction strategy. The failure to reach that agreement triggered the austere limits in place today, and Hall’s projection about their impact mirror those made by BPC in 2012, before the sequester first went into effect.

As we’ve pointed out before, both defense spending and non-defense discretionary spending (which includes most of the federal budget’s investments, such as spending on infrastructure and scientific research) are already projected to shrink to historically low levels and are not the primary drivers of future deficits. Fiscal prudence should be pursued through tax and entitlement reforms, as recommended in the Domenici-Rivlin 3.0 proposal released earlier this year, instead of further reductions to these important and already limited portions of the budget.

As policymakers debate discretionary spending levels this fall, they should take CBO’s findings into consideration and craft a more sustainable and economically beneficial fiscal policy.

Update: At an event organized by the Brookings Institution this week, former Federal Reserve Chairman Ben Bernanke also added his voice to the growing chorus of policy experts calling for reversal of sequestration. He said that while deficits are a long-term threat, defense policy should focus on countering immediate dangers facing the country.