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What will have a greater impact in reducing the deficit: the sequester or ‘Obamacare’?

“If you look at the biggest thing that are cutting our deficit over the medium and long run, it’s actually the Affordable Care Act, which is, you know, by bringing down the cost of health care, that doesn’t just help our economy, it helps bring our deficit down.”

— Jason Furman, chairman of the White House Council of Economic Advisers, during an interview on MSNBC’s Jansing & Co., Nov. 8, 2013

Furman made this counterintuitive comment after MSNBC’s Chris Jansing made the observation that Republicans would say that “the effect of the sequester has been terrific on the debt. And they would take a lot of credit for what we are seeing right now in debt reduction.”

So we decided to look into the data and see what it says.

The Facts

First of all, a caveat: The information that follows is based mostly on estimates by the nonpartisan Congressional Budget Office, some of which are long-range estimates subject to many variables. Reasonable people might disagree on whether these estimates are correct — skeptics might argue that the long-term cost of “Obamacare” is undercounted–but it’s the best that we have at the moment.

Although Furman did not directly address Jansing’s comment, we were curious to see if the impact of the sequester and the Affordable Care Act on the deficit could be measured for fiscal year 2013. The deficit fell by $409 billion, so how much can be attributed to either the health care law or the sequester?

In Table 1-7, the CBO’s 2013 Budget and Economic Outlook shows that the sequester accounts for roughly $42 billion in deficit reduction in the 2014 fiscal year. (Sequester, a 10-year straight line reduction in discretionary spending, did not start until almost half of the fiscal year was over, so the savings really become apparent in 2014.)

Meanwhile, CBO in 2010 estimated that the Affordable Care Act  would reduce the deficit by $41 billion in 2013. (The original $56 billion estimate included savings from a provision that has been dropped and also from unrelated changes in student loans, so we have removed those items to arrive that this figure.) Reductions in Medicare spending were responsible for a large part of the deficit reduction in 2013;  the law will not be fully implemented until 2014.

In other words, both the health-care law and sequester each accounted for about 10 percent of the deficit reduction in 2013.   That’s nothing to sneeze at, but it’s worth noting that a one-time $50 billion payment from Fannie Mae had an even bigger impact.

Now let’s look at Furman’s comment. His claim was that the Affordable Care Act will have a greater impact in reducing the deficit in the “medium and long run” than the sequester. On one level, this makes sense, as the sequester is scheduled to end after 10 years, whereas the Affordable Care Act is deemed to be permanent.

In the near term, the data show, the sequester shrinks the deficit more.  Each year, it reduces the deficit by about $100 billion, or about 0.5 percent of the overall economy (gross domestic product) in that period. (Since the economy keeps growing, and the annual size of the sequester is about the same, by the end of the sequester its impact amounts to about 0.35 percent of GDP.)

Meanwhile, the health care law adds to the deficit in its early years of implementation—total deficit reduction in its first five years is just $7 billion—but then, according to CBO’s numbers, it starts to reduce the deficit. (We are relying on a 2012 letter from the CBO to House Speaker John A. Boehner (R-Ohio), regarding a GOP bill to repeal the health-care law, and so every number has to be flipped, such as from negative to positive, to measure deficit reduction.)

To Furman’s key point, after the first 10 years, CBO predicts in the letter to Boehner that (after flipping the numbers) the health care law would reduce the deficit by 0.5 percent  of GDP  between 2023 and 2032.

Of course, CBO’s prediction is laden with caveats, including noting that some provisions of the law (such as reductions to Medicare providers) may not be possible to sustain over time. If those elements of the law are changed, the reduction in the deficit would shrink. But it does show that over the next 20 years, the overall impact of the health-care law on the deficit would be larger and more sustained than the sequester.

“The deficit came down by over $400 billion last year and only about one-tenth of that deficit reduction was due to the sequester,” Furman told The Fact Checker. “More importantly, the sequester does not have any structural reforms and ends after 2021 so it contains no long-run deficit reduction. In contrast, the Congressional Budget Office estimated that the Affordable Care Act would have significant long-run deficit reduction and thus over the medium- and long-run makes a much more important contribution to addressing our fiscal challenge while contributing to lower health cost growth.”

The Pinocchio Test

In the immediate future, the sequester will reduce deficit more, but after the next eight or so years, the Affordable Care Act is deemed to have a greater long-term impact, according to the CBO. Furman’s quote referenced the “middle and long run,” which we read as a single period of time.

Any massive piece of legislation affecting such a large part of the economy will have many unknown consequences, both good and bad, that are impossible to predict. (As one reader put it, “you are trying to compare how fast a swimming pool drains from a constant hole to how fast it will fill up from future rains.”)  It would be interesting to revisit this claim in 20 years. But from what we know now, Furman’s statement stands up to scrutiny. He earns a rare Geppetto Checkmark.

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