What Might the Sequester Mean for You?

Attention-grabbing headlines on the sequester abound, and, if you’re like many people, you’re wondering how the spending cuts may affect you. Our latest article, “The Sequester and What It May Mean for You,” discusses the potential impact of the cuts, both on the economy and on your personal financial picture.

As always, our focus is on keeping you informed and helping you stay on track toward your long-term financial goals, no matter the challenges the economy may face. If you have questions about anything in the attached article, please don’t hesitate to contact our office. 

The Sequester and What It May Mean for You

Presented by Christian Rezapour

As headlines announce a possible sequester, many people are wondering what the budget cuts will mean for the economy—and for their own finances. Here, we address several of the key questions that may be on your mind.

What is the sequester?

The sequester is a package of mandatory federal spending cuts that, barring further action by Congress, will take effect on March 1, 2013. It would result in a macro-level spending reduction of $85 billion this year, with additional cuts in subsequent years. These cuts would affect virtually every program that receives federal funding, including national defense, education, and law enforcement programs.

At this point, it seems unlikely that Congress will act to stop the cuts. Instead, the debate in Washington now centers on how, exactly, the cuts will be made, and whether or not there should be tax increases in order to offset them.

What would it mean for the economy?

While $85 billion sounds like a lot of money to the average consumer, it is a relatively small portion of the overall federal budget. Indeed, unlike the tax increases that recently took effect, the spending cuts should have a relatively muted impact on the economy. The best estimates at this point suggest a drag on economic growth of about 0.5 percent of gross domestic product (GDP). With current growth rates estimated at around 1.5 percent to 2.5 percent for the year, a 0.5-percent drag represents a real headwind, but not one that would tip the economy into a recession.

Further, while the spending cuts would undoubtedly have an initial impact, they would be a one-time event. The economy would take a hit in the first quarter and possibly the second, as it did from the tax hikes at the start of the year, but then carry on. Plus, even as federal spending declines, state and government spending is expected to start to recover, which could offset much of the damage.

What would it mean for you?

Government spending cuts can have real consequences for the average citizen, especially for federal employees, members of the military, and teachers. Airport personnel may be furloughed, resulting in delays for passengers. National parks may slash their budgets, affecting visitor experiences. As the cuts are slated for nearly every federal program, they stand to touch your life in some way, big or small.

When it comes to your financial bottom line and your tax bill, however, the sequester isn’t likely to have a significant effect. 

The final word

The upshot is that, unlike the fiscal cliff situation at the end of last year, the political incentives favor letting the sequester hit. Fortunately, also unlike last year, the damage is likely to be moderate rather than severe. Many believe that cuts like these have to happen, and the developing consensus that we should let them happen now may actually be a long-term positive for the economy, despite the short-term pain.

As always, we’re here to keep you informed and best positioned for whatever challenges the economy may face. If you have specific concerns about the sequester and how it may affect your personal financial objectives, please do not hesitate to contact us.

Christian Rezapour is a financial advisor at Wealthmark Financial Services, LLC located at 808 Valley Forge Rd, Suite 104, Phoenixville, PA 19460. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 610.400.1111 or at mailbox@wealthmark.net.

© 2013 Commonwealth Financial Network®