3 Reasons Why Credit Unions Should Fear Sequester

By Henry Meier

With Congress in recess this week and both sides showing an unwillingness to compromise, it appears increasingly likely that March 1 will arrive without Congress averting a projected $85 billion in automatic cuts to defense and discretionary spending.  The cuts are the first installment of a total of $1.1 trillion in government spending reductions over the next ten years.  So why should credit unions care?

1.  Although March 1 will likely arrive without a deal, at some point you will see a serious effort to come up with an alternative deficit reduction plan and it’s under this scenario that we have to be prepared to fight for our tax exemption.  This is not abstract speculation.  Former Clinton Chief of Staff Erskine Bowles and former Wyoming Senator Alan Simpson have produced an updated version of their deficit reduction package that puts an estimated $600 billion in government tax exemptions, including that granted to credit unions, on the table.  I am not saying we should panic, but we should certainly be on the alert.  Congress would never eliminate our not-for-profit status on an up or down vote, which means that if that is ever to happen it would be tucked away in a larger package of spending and tax reforms.

2.  The economy is growing but still weak and no one seems to doubt that the Sequester will have a negative impact on economic growth.  The question is by how much.  Proponents of taking a hard line on the need for fiscal austerity point out that government spending on entitlement programs such as Medicaid, Medicare and Social Security is going to spike over the next decade and that if the country doesn’t get its deficit under control now, it will have to face even tougher choices down the road.  The deficit hawks have a point, according to the Congressional Budget Office unless changes are made to current law, the budget deficit will grow to an estimated 87% of the country’s Gross Domestic Product by 2023.  It is already a hefty 73% of GDP.  But the problem is that the Sequester cuts don’t impact non-discretionary spending.  As a result, it would disproportionately impact defense spending and government employment.  In other words, the stimulus provided by this type of spending would be sharply reduced at a time when we still need to keep the economy growing.  If you think this is an exaggeration, read this article from Bloomberg News analyzing the impact defense spending had on the retraction of economic growth in the fourth quarter of last year.

continue reading »