Looming automatic federal spending cuts might deal the nascent economic recovery a short-term setback, but investment advisers say the medicine is necessary to start curing the nation's long-term fiscal ills.
If Congress and President Barack Obama can't agree on legislation to avert the reductions this week, the $85 billion sequestration will go into effect Friday. After that date, federal agencies would have until Sept. 30 to implement a 5% across-the-board cut — 8% for defense programs.
“Is it going to be painful? Absolutely,” said Michael Masiello, president and owner of Masiello Retirement Solutions. “I hate the concept of doing it now. It's not a pleasant pill. But the American people need to swallow it — and hold the politicians accountable.”
Indeed, an InvestmentNews survey last week found that 66% of the more than 200 respondents support sequestration.
Among the re-spondents, 74% said the spending cuts would hurt the economy. Of those who felt that way, 73% said the short-term pain would be worth the long-term gain.
“If sequestration takes effect, it will certainly weaken the economy,” said Neal Solomon, managing director of WealthPro LLC. “The question is: Is that better or worse than continuing on a path of not addressing the problem? This problem needs to be addressed.”
The Congressional Budget Office has estimated that sequestration, combined with the tax increases that hit this year as part of the fiscal cliff deal, would reduce economic activity by 1.5 percentage points, cutting estimated 2013 GDP growth in half to 1.5%. Job losses related to sequestration have been estimated at between 1 million and 2 million, while government cutbacks could affect everything from food inspection to transportation security.
Agencies such as the Securities and Exchange Commission are bracing for cuts. The SEC, which might have to trim its budget by more than $100 million, has not provided any details on how it would deal with a funding reduction, but SEC spokesman John Nester said that no staff furloughs or layoffs would result from sequestration.
Chairman Elisse Walter told reporters Feb. 14 that in the event of sequestration, it wouldn't be able to hire all the people it needed. “We won't be able to do all the things we plan to do, but we are prepared,” she said.
“Essentially, they have to operate with both hands tied behind their back and walking on crutches,” said Marilyn Mohrman-Gillis, managing director of public policy and communication at the Certified Financial Planner Board of Standards Inc.
Kevin Berenzweig, a retirement adviser at Retirement Strategies Group, has mixed feelings about the impending budget cuts. He said that although federal spending must be reined in, sequestration is a blunt instrument that would harm a fragile economy.
“It's going to have a negative psychological effect on consumer spending,” he said.
Mr. Berenzweig may see the impact of sequestration directly in San Diego, where he is based. The city is home to substantial U.S. Navy operations.
“It's definitely a concern,” Mr. Berenzweig said.
The tussle over sequestration is one of a lineup of fiscal battles in Washington. On Jan. 1, lawmakers and Mr. Obama narrowly averted automatic tax increases and spending cuts with the so-called fiscal cliff bill.
After sequestration, if Congress can't agree on a new federal budget — or extend the current one — by March 27, the government will shut down. And the federal debt limit ceiling is scheduled to expire in August.
Sequestration is the most easily survivable clash on the fight card, according to Barry Glassman, president of Glassman Wealth Services LLC.
“It's the least evil of the four,” Mr. Glassman said.
Sequestration was set in motion last year as an element of the plan to extend the debt limit ceiling, although both Democrats and Republicans had expected to come up with another budgetary blueprint that would not impose such across-the-board cuts. Neither side, however, has shown any willingness to compromise before the deadline. Still, it's unclear how long sequestration might last.
Even in his home region — Washington, D.C. — Mr. Glassman doesn't foresee a big sequestration impact if it doesn't last for more than a year.
“I don't think it's going to affect home prices, consumer spending and overall economic activity throughout the D.C. area,” said Mr. Glassman, who does not have any federal-employee clients.
Mr. Obama is calling on Congress to enact a package of spending cuts and tax reform, such as closing some deductions and loopholes, to stave off sequestration until lawmakers can agree to a long-term budget. Republicans counter that the fiscal cliff bill already provided tax increases on the wealthy and that Mr. Obama must offer more on the spending side.
There is some wiggle room. Under federal rules, agency employees must be given at least 30 days' notice before being furloughed — providing time for lawmakers to undo the cuts.