Government spending has been a major concern for several governments all over the world. It is the obligation of every government to ensure that the level of spending is manageable and does not cripple the country’s economy.  The government should put in place several measures that ensure that the level of spending does not exceed the sources of revenue. As a result of this, sequestration has become inevitable in the course of running government expenditure.

Sequestration has been used for several decades in economics to refer to the process through which mandatory spending cuts in the federal budgets are achieved. This process occurs in a fiscal year whereby the government revenue is less compared to the cost of running the government. According to congressional research, sequestration has been defined as the permanent cancellation of the federal budget allocations by a certain uniform percentage. This sequestration percentage must be applied uniformly to all government projects, programs and activities within the budget[1].

The main motive of sequestration is to minimize the level of government spending. However, some projects and government programs are governed by special rules which requires a sequester. The motive of imposing automatic spending cuts on the government budget has a long history but was first established in 1985. This was through balanced budget and emergency deficit control Act of 1985.

Sequestration idea has been used largely and widely in an attempt to maintain sound budgetary allocations. The budgeting process must be critically thought of to ensure that prioritization of government spending practiced. The most notable example of a sequestration practice is exhibited by the budget control act of 2011. This Act was vehemently used to encourage congress to reduce the annual deficit by $ 1.2 trillion y the year 2012. This was done in United States of America[2].

Sequestration has major effects on the multiplier model. The multiplier model has great assumptions such as constant price levels. There is also a high likelihood that sequestration will also greatly affect the AS/AD model. This is because the whole sequestration process involves cuts in government expenditure. Government expenditure is a critical component of the demand function. Sequestration in its own capacity tends to decrease the government expenditure significantly. A decline in the level of government expenditure will significantly change the aggregate demand.  This subsequently has significant effect in the AS/ AD model.

AS

price

AD2          AD1

Output

A sequestration effect will lead to a decrease in government expenditure. This will lead to subsequential decrease in the aggregate demand thus making the aggregate demand to shift from AD1 to AD2 as shown in the above figure. This will have a significant effect on the level of output and the general prices. Nevertheless, there will be no effects on the aggregate supply cure since the supply side of the AD/AS model is not affected. An increase in the government expenditure would mean the opposite. This is also likely to have significant effects on the money market.

The multiplier effect is also of great concern in the sequestration process. This is because sequestration is supposed to be implemented through a uniform percentage. The multiplier concept on the other hand has significant effect on the AS/AD model. An increase or decrease in the expenditure or components of the model leads to an increase or decrease of more than the change, this effect is due to multiplier effect. Through this process, sequestration will also significantly lead to great change. Sequestration is an inducement to the economy which greatly affects the equilibrium in the AD/AS model.

Sequestration has numerous effects on the economy of a country. Automatic cuts in government spending will have serious effects on inflation and economic growth. A reduction on the government spending can have adverse effects on the nations GDP. This is because the automatic cuts in the spending can lead to the government not offering most serious and critical projects. Since sequestration has a uniform percentage in the spending, the issue of prioritization is not taken care of and hence there is a great possibility of sacrificing essential programs in the pursuit of sequestration[3].

Opponents to sequestration have argued that the process is likely to lead to economic recession and slower economic growth. However, the sequestration process is not likely to cause definite effects on the economy. The level of sequestration largely depends on the percentage adopted in the country in question. This is because the sequestration differs in percentages that have different effects on the multiplier concept. If the multiplier is greater, the effect in the economy will also be great thus making it essential for proper considerations[4].

Sequestration is also expected to have significant effects on the economy in terms of employment and inflation.  In an attemptto reduce government spending, majority of states in the world have ended up increasing the levels of inflation. It is argued that under sequester, the government expenditure increases more than it would be in absence of sequestration. This later translates to increase in price levels which subsequently lead to increased inflation. The high levels of inflation will translate to increase housing rates, compromised health services and poor education and other essential services to the poor families.

Inflation and levels of unemployment are inseparable macro-economic factors. Automatic cuts in government spending are likely to cause high levels of unemployment. For instance, cuts would significantly affect the basic public services and investment in the public domain. This will have significant effect on the level of employment in the state.  Cuts in governments spending in the social sectors will have a significant effect on the number of employed staff. This is because it will be mandatory for the firms to reduce staff. These furloughs are critical in determining the unemployment rate in the society.

It is believed that the sequestration process will always lead to a slow economic growth. For instance, in United States, sequestration was expected to lead to a cut of the GDP by 0.6 percent by 2013. This would translate to loss of 750,000 jobs as asserted by Douglas Elmendorf in a congress sitting. The sequestration process is likely to lead to more levels of unemployment if policy makers fail to consider other essential sectors of the economy. The opponents to sequestration advocates for introduction of a balanced package of tax and spending measures that will ensure equity and manageable levels of poverty. This will be very critical in ensuring steady economic growth[5].

Fed’s monetary policy and mission can also be a critical tool in ensuring proper fulfillment of the government policies. This is because his mission was to ensure that there is steady economic growth which is driven by presence of enough money and available credit to all and with minimum inflation. He actually advocated for free interaction of macro-economic environment. He introduced three important tools which include discount rate, reserve requirements and open market operations. This is a very important approach because it considers both the revenues and expenditure side of the economy. This is essential for ensuring that there is equilibrium in both money and product market. The prioritization of government programs and projects can also be very well implemented in the process.

Bibliography

Arnold, Roger A..Macroeconomics. Mason, OH: South-Western/Cengage Learning, 2011.

Boyes, William J., and Michael Melvin.Macroeconomics. 8th ed. Mason, OH: South-Western Cengage Learning, 2010.

Hall, Robert Ernest, and Marc Lieberman. Macroeconomics: principles & applications. 5th ed. Australia: South-Western Cengage Learning, 2010.

Mankiw, N. Gregory. Principles of macroeconomics. 6th ed. Mason, OH: South-Western Cengage Learning, 2012.

McEachern, William A.. Macroeconomics: a contemporary introduction. 9th ed. Mason, OH: South-Western Pub, 2012.

[1]Boyes, William J., and Michael Melvin.Macroeconomics. 8th ed. Mason, OH: South-Western Cengage Learning, 2010.

[2]McEachern, William A.. Macroeconomics: a contemporary introduction. 9th ed. Mason, OH: South-Western Pub, 2012.

[3]Hall, Robert Ernest, and Marc Lieberman. Macroeconomics: principles & applications. 5th ed. Australia: South-Western Cengage Learning, 2010.

[4]Arnold, Roger A..Macroeconomics. Mason, OH: South-Western/Cengage Learning, 2011.

[5]Mankiw, N. Gregory. Principles of macroeconomics. 6th ed. Mason, OH: South-Western Cengage Learning, 2012.

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