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The Government House Blog
How Will "Sequestration" Affect the Virgin Islands? 
Posted by Jean P. Greaux, Jr. on February 28, 2013 at 4:50 PM AST

Governor de Jongh said today that a Bureau of Economic Research study tabulating the negative impact of the upcoming federal sequestration budget cuts on the Virgin Islands provides more evidence that Congress should avert the plan.

If Congress fails to prevent sequestration, defined as “an automatic application of uniform spending reductions to enforce stringent budget goals,” the territory stands to lose more than $100 million in federal funding by Fiscal Year 2021, according to the BER.

Download the BER's Report on Sequestration's Impact in the Virgin Islands .pdf (637KB)

“Sequestration is a blunt approach to deficit reduction that will cause unnecessary economic harm across the country just as we emerge from a severe recession. This plan is not an effective means to reduce the federal deficit because it threatens our country’s and our territory’s fragile economic recoveries,” he said.

Congress enacted the sequestration through the Budget Control Act of 2011. Earlier this year, the sequestration plan was modified as part of the American Taxpayer Relief Act of 2012, a bargain to avoid the so-called fiscal cliff. The broad federal spending cuts are now set to go into effect on March 1, and they will immediately impact the Virgin Islands.

The sequestration cuts will hamper ongoing economic recovery efforts in the territory by reducing federal grant spending by well over $10 million annually—more than $100 million by fiscal year 2021. In turn, reduced public sector spending lowers potential consumption and investment needed to sustain the current economic recovery. 

The sequestration will reduce federal grant funding to the Department of Education by $2.6 million, the Department of Human Services by $1.7 million—including Head Start by over $700 thousand—and the Public Works Department by over $1.6 million. 

Those cuts will take their toll on education, human services and transportation systems almost immediately and will continue to negatively impact the territory for many years to come. The enormous fiscal and economic uncertainty caused by sequestration makes it difficult to predict overall indirect costs to the Virgin Islands economy, but the cuts will without doubt adversely affect educational, environmental, energy, economic development, and disaster relief programs that benefit the territory. 

With the territory already experiencing unemployment at 13.3 percent, the elimination of critical federal grant spending will significantly impact government services.

“No one denies the critical importance of reducing the federal deficit, which currently hovers at around 73 percent of our nation’s gross domestic product, and without substantial spending, cuts will continue to rise,” the governor said. 

Federal lawmakers are understandably concerned with the growing budget deficit, especially in light of future U.S. demographics that show an aging population increasingly reliant on Medicare, Medicaid and Social Security benefits, according to the governor.

But until the U.S. economy returns to a stronger growth path, simply sustaining the automatic reductions is not a viable deficit reduction strategy, he said.