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By Bob Van Heuvelen
and Diane Major of VH Strategies.
On Friday, March 1, $85 billion in automatic budget cuts are
scheduled to take effect, as part of a $1.2 trillion deficit reduction package
spread over 10 years. “Sequestration,” as these cuts have become known, were
included as part of the Budget Control Act of 2011. The legislation mandates
that these automatic spending cuts be equally divided between defense and
non-defense spending accounts
While the allocation of spending cuts will be subject to the
final directive from the Office of Management and Budget (OMB), the
Congressional Budget Office estimates the spending cuts to be divided among the
following areas:
• 7.9
percent cut in discretionary defense spending ($42.7 billion in 2013)
• 7.8
percent cut in mandatory defense spending ($0-0.5 billion in 2013)
• 5.2
percent cut in non-defense discretionary spending ($28.7 billion in 2013)
• 5.8
percent cut in non-defense mandatory spending ($4.0 billion in 2013)
• 2.0
percent cut in Medicare payments to providers ($9.9 billion in 2013)
Impact from the
"Fiscal Cliff" legislation:
At the end of the 112th Congress, the American Taxpayer
Relief Act was passed to avert what became known as “the fiscal cliff,” a host
of expiring tax and spending measures, including sequestration. As part of the
fiscal cliff deal, this legislative package delayed sequestration for two
months, from January 1 until March 1.
As a whole, the current sequester would impose $85.3 billion
in across-the-board budget cuts across the federal government for the 2013
fiscal year. Since the cuts will be condensed into a 7-month period, as opposed
to a full calendar year, the effective cut could be 3 to 5 percent higher than
the estimated figures.
The mandatory spending programs exempted from the automatic
reduction include: Social Security, Medicaid, food stamps, veterans' benefits,
and the Children’s Health Insurance Program (CHIP). These exemptions were part
of the earlier budget agreement, which raised the debt ceiling in the summer of
2011.
The following table, courtesy of the National Journal,
illustrates the spending cuts to key government agencies in the 2013 fiscal
year:
Democrats and Republicans have been trading rhetorical
attacks and alternative proposals but, as of this writing, there is no obvious
path forward to delay sequestration a second time despite intensive lobbying by
industries heavily impacted by the cuts.
President Obama and his administration have begun a last
minute push to raise public awareness about sequestration, touring the country
to visit communities that will be severely affected. House Speaker John Boehner
(R-OH) has asserted that the House of Representatives twice passed legislation
averting sequestration by replacing it with other budgetary cuts. The Speaker
has since insisted that the Senate move its own bill before any legislation is
taken up in the House. Failing that, he and the House Appropriations Chairman
Harold Rogers (R-KY) have suggested that sequestration go into effect.
Senate Democrats and Republicans are likely to vote on
competing proposals this Thursday, neither of which look to achieve the 60-vote
threshold required for passage. Senate Democrats will put forward a $110
billion deficit reduction package to postpone the sequester through December of
2013. Their proposal recommends a 50-50 split of targeted cuts and new revenue.
Similarly, Senate Republicans are considering a variety of alternatives,
including providing flexibility to agency heads to decide how to administer the
cuts although some members have reservations about giving President Obama more
authority to design the cuts. Conventional wisdom is that sequestration will
hit, at least temporarily, before Congress works out a compromise agreement.
A compromise depends largely on the actual fallout from
sequestration in the public eye. The CBO estimates that the combined fiscal
tightening taking place will result in a 1.5% reduction in GDP growth for the
year, with the sequester accounting for 0.6% of that number. In recent
testimony to the Senate Banking Committee, Chairman to the Federal Reserve Ben
Bernanke suggested that the fiscal drag associated with sequestration would
noticeably weaken the economy and promoted more gradual spending cuts.
Nevertheless, it remains difficult to project the reaction of the public, the
timing of the impact and the overall effect on the economy.
Next Legislative
Deadline:
Continuing Resolution The next legislative deadline that
requires congressional action is the expiration of the Continuing Resolution
(CR) on March 27. Depending on public reaction, the CR may provide an
opportunity to retroactively address the sequester cuts. Moreover, there has
been some discussion about a government shutdown. Looking at the fallout from
the last shutdown in 1995, both political parties appear to want to avoid that
scenario. A lengthy standoff is possible. Absent an agreement on the CR,
however, the government will effectively shut down and leave sequestration in
place.
The fate of the sequester remains closely tied to the
ongoing budget debate about the size and scope of government. The two parties
are divided over the question of raising additional revenue, which the
President and Congressional Democrats consider necessary to blunt
sequestration. If the public outcry is sufficient enough, Republicans may be
persuaded to accept additional revenues, most likely in the form of the closure
of certain tax preferences. On the other hand, if the American people are
unmoved by the automatic cuts, Congress may be resigned to allowing
sequestration to take full effect. Breaking the stalemate over sequestration
will require a significant move away from each party’s stated position. Failing
that, sequestration will take effect and will remain in place for the
foreseeable future.
