Goldman’s Alec Phillips has a great note out about the coming decline in government spending.
It turns out, we’re about to see a period of spending declines that is historically very rare. It’s all about the sequester and the decline in war spending.
In addition to sequestration, two other factors are likely to reduce real federal consumption and investment (i.e., the components of federal spending that is counted toward GDP in the national accounts) over the next few years:
Spending caps enacted in 2011. In addition to establishing the sequester, the Budget Control Act of 2011 also established spending caps that have already taken effect. These are expected to reduce real yoy spending growth by $20bn in 2013 and by another $10bn in 2014. Unless Congress designates spending as “emergency,” spending above the caps results in across-the-board cuts similar to but separate from the across the board cuts set to take effect March 1.
Reduced war spending. Congress appropriated roughly $160bn in 2010 and 2011 for overseas military operations; this has been reduced to around $100bn for 2013. The President’s most recent budget proposed to cap war spending going forward, which it estimated would reduce war-related spending by around $30bn in 2013, and by $50bn to $60bn in 2014. Although some war spending ends up being accounted for as transfer payments to the rest of the world–for example, when the US government reimburses foreign powers for joint military operations–the majority of it shows up as federal consumption and gross investment.
Sequestration, spending caps, and reduced war spending will together reduce real federal consumption and gross investment by 11% over the next two years. This is a large decline in historical context, but it is not without precedent. This would mark the third decline in the last 50 years; the first occurred around 1970, after Vietnam War spending had peaked, followed by another around 1990 as military spending declined following the end of the Cold War and multiple rounds of spending caps were enacted.
This chart shows puts the coming decline in spending in context.
Photo: Goldman Sachs
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