CBO: Cancel spending cuts now, boost economy in short run

July 25, 2013: 6:14 PM ET
capital cbo sequester
Canceling budget cuts would help the economy over the next year and a half but could weigh on the long run unless savings are replaced.
NEW YORK (CNNMoney)

The economy could get a modest boost if Congress cancels the across-the-board budget cuts known as the sequester, according to new estimates from the Congressional Budget Office.

Canceling the cuts by Aug. 1 -- a move no one expects lawmakers to make -- would increase federal spending by an estimated $14 billion through the end of September, and by another $90 billion in fiscal year 2014, which starts Oct. 1.

Those increased outlays, in turn, could push up inflation-adjusted economic growth by 0.7% and increase employment by 900,000 jobs in the third quarter of 2014. Both numbers fall in the middle of CBO's estimated ranges for growth and jobs.

Barring other changes, however, there are potential downsides to canceling the sequester.

Related: Bernanke: Congress still a risk to economy

"Although output would be greater and employment higher in the next few years if the spending reductions ... were reversed, that policy would lead to greater federal debt, which would eventually reduce the nation's output and income below what would occur," the CBO said.

The agency's analysis was done at the behest of Chris Van Hollen, the top Democrat on the House Budget Committee.

Democrats have been pushing to cancel the sequester and replace its savings with longer term spending reductions and increased revenue.

More revenue is a nonstarter for Republicans, who want to preserve the spending caps that the sequester calls for beyond 2013. They do, however, want to restore the funding cuts made to defense and compensate by increasing the cuts to domestic programs, which is a nonstarter for Democrats.

That helps explain why lawmakers have yet to bridge the $91 billion gap between the parties' proposed budgets for the next fiscal year, and sets them up for a tough fight this fall.

The effects of the sequester, to date, have been uneven both regionally and across different sectors of the economy. What's more, its economic impact has been hard to measure definitively since it is still unfolding. For instance, the furloughing of 650,000 Department of Defense employees just began this month. But most economists believe it is and will continue to have a dampening effect.

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