Regardless of the outcome of the upcoming national elections, a budgetary time bomb, set to go off on January 2, 2013, threatens to kill millions of jobs and throw the country back into recession, according to a recent study by the nonpartisan Congressional Research Service (CRS). The fuse was lit on August 2, 2011, with passage of the Budget Control Act of 2011 (BCA), a political compromise between Democrats and Republicans to avoid a government shutdown over the need to raise the federal debt ceiling.

If Congress fails to cut the deficit by at least $1.2 trillion, BCA will trigger automatic across the board cuts (called sequestrations) worth $984 billion over the next nine years, split about equally between defense and nondefense programs. The cuts would not apply to Social Security, Medicaid, civil and military employee pay, or veterans, and Medicare’s budget cut is limited to 2%. For 2013 alone, the cuts would amount to $109.4 billion. There is no realistic chance that Congress will pass the required cuts.

The CRS study reviews three studies of the economic impact of the sequestrations, because government spending creates millions of jobs, both directly by paying wages to employees of the government and its contractors, and indirectly when contractors buy goods and services from businesses in other industries that employ workers. Also, when those workers spend their paychecks they induce the creation of even more jobs.

One of the studies estimated that the cuts would kill about 2.1 million jobs in 2013, including 746,000 direct jobs, 433,000 indirect jobs, and 959,000 induced jobs. A different but consistent study estimated defense-related job losses at between 900,000 and 1.2 million.

On the non-defense side, a National Education Association study estimated that cuts to education would cost about 80,000 jobs, and an Aerospace Industries Association report foresaw between 40,000 and 132,000 jobs lost because of cuts to the Federal Aviation Administration budget.

In the health care sector, one study estimated that sequestration of National Institutes of Health extramural awards to states would kill about 33,000 jobs in 2013, and another found that the Medicare cuts would cost about 500,000 jobs in 2013.

Although these studies assume, as they must, that the sequestrations would become permanent, it may be more likely that the President and Congress—regardless of the election results—will decide that jumping off the fiscal cliff and setting off a new recession is simply too costly and reach a long-term deal featuring both tax increases and targeted spending cuts in late January. In that case, the sequestrations would barely have time to cost any jobs.

-Matt Bewig

To Learn More:

Sequestration: A Review of Estimates of Potential Job Losses (by Linda Levine, Congressional Research Service) (pdf)

Passing Over the “Fiscal Cliff” in Early 2013 Seems Increasingly Likely (OMB Watch)

Misguided “Fiscal Cliff” Fears Pose Challenges to Productive Budget Negotiations: Failure to Extend Tax Cuts Before January Will Not Plunge Economy into Immediate Recession (by Chad Stone, Center on Budget and Policy Priorities)