The legal enactment of fiscal sequestration in the US last Friday brings to an end a series of haphazard measures to tighten budgetary policy since the Obama fiscal stimulus was reversed in 2010. The overall result has been to raise $3,500 billion over the next decade, around 2 per cent of GDP.
Taken together with other measures which were already in the baseline for policy, the cumulative fiscal tightening will amount to 4.8 per cent of GDP from 2010-14, of which 1.5 percentage points will occur this year, and 0.6 percentage points will come from the sequestration order itself.
This tightening has set in stone the fiscal stance for President Obama’s second term and it will ensure that the US budgetary position is “sustainable” over that period. It is not yet clear, however, whether the economy can grow robustly while the measures take effect.