Sequestration – Will It Happen?

by the Campaign on Hyman Needs – The Human Needs Report

February 21, 2012

The Budget Control Act of 2011 (BCA, PL 112-025) that was passed last August calls for
significant deficit reduction. The first installment of nearly $1 trillion in cuts went into effect
immediately and is achieved through binding 10-year limits on annual appropriations bills. The
second round of savings should add up to $1.2 trillion over ten years. The legislation set up a
fast track for passing a deficit reduction plan that could have combined spending cuts with
revenue increases.

Because the Joint Select Committee on Deficit Reduction (aka the Super Committee) was not
able to agree upon a deficit reduction plan and get it through Congress by last Thanksgiving, the
Budget Control Act requires an alternative way of achieving $1.2 trillion in savings, utilizing no
revenue increases and once again concentrating on cuts from appropriations. The BCA
establishes two caps starting in FY 2013. The law creates a cap on defense spending (mostly the
Department of Defense plus $24 billion elsewhere, such as nuclear weapons under the control of
the Department of Energy) and another cap on nondefense expenditures. For FY 2013, the
defense cap is set at $546 billion; the nondefense cap is $501 billion, for a total of $1.047 trillion.
Separate caps remain in place through 2021.

The Super Committee’s failure to reach agreement has triggered automatic, across-the-board cuts
in all non-exempt programs (referred to as ‘sequestration’) to take place beginning in January
2013. Starting in 2014, instead of cuts applied across-the-board to all non-exempt programs,
defense and non-defense cuts can be made any way appropriators see fit, as long as they add up to
the required amounts for defense and non-defense.

Sequestration will require cuts of $54.7 billion each of the years from 2013-2021 in national
defense and in non-defense programs. In 2013, approximately $38.6 billion in non-defense cuts
will come from discretionary programs and $16.1 billion from mandatory programs. Mandatory
programs exempt from sequestration include Social Security, Medicaid, Children’s Health
Insurance Program, Supplemental Nutrition Assistance Program (food stamps) child nutrition,
Supplemental Security Income, the refundable Child Tax Credit and Earned Income Tax Credit,
veterans’ compensation and retirement benefits. Cuts to Medicare would apply to payments to
providers and insurers, not beneficiaries, and are limited to 2 percent annually. On the
discretionary side exemptions include veteran’s medical care and Pell grants and a limit of 2
percent in cuts for certain health centers and services. Sequestration would be achieved solely
through spending cuts and with no tax increases. (See more details in the Center on Budget and
Policy Priorities report, “How the Across-the-Board Cuts in the Budget Control Act Will Work.”)
(http://www.cbpp.org/cms/?fa=view&id=3635)

There isn’t much that Republican leaders in Congress and the White House agree on, but they
are agreed that going ahead with sequestration is a bad idea. Neither wants to apply the required
cuts to the military. The President’s budget (see article in this issue) does not assume that these
automatic cuts will take place. Instead, it puts forth an alternative plan that saves more over the
next decade than the minimum required by the Budget Control Act, and does so by replacing the
exclusive focus on spending cuts (mostly in appropriations) with a more balanced mix that
includes $1.5 trillion in revenue increases and $640 billion in savings in mandatory programs
like Medicare and Medicaid.

The President’s plan rejects the Budget Control Act’s required annual defense and nondefense
caps, and instead calls for a different and more temporary dividing line. For FY 2013, the
Obama budget puts in place caps on “security” and “non-security” spending. The “security”
category is broader than “defense” – it adds the Departments of Veterans Affairs and Homeland
Security and most State Department and international aid expenditures. The President’s budget
sticks to the same overall spending cap for FY 2013: $1.047 trillion. But it divides it into $686
billion for security and $361 billion for non-security. This change helps the President stay within
the cap limits. If he used the defense cap as required by the Budget Control Act, the defense
spending in his budget for FY 2013 would exceed that cap by $5 billion (and would under spend
the non-defense category by $5 billion).

And in FY 2014 and beyond, the President’s budget assumes there will no longer be separate
caps at all – just one total that the President and Congress can divide up any way they choose.
This approach does what the Budget Control Act had provided if the Super Committee had
successfully proposed a deficit reduction plan. But they did not; going back to the
security/non-security categories for a year and then erasing the dividing line will require
agreement by Congress to change the law.

Since sequestration was triggered by the failure of the Super Committee, doomsday scenarios
have been promulgated by mostly Republican and some Democratic defense hawks and Defense
Secretary Leon Panetta that the additional cuts to the Pentagon would result in a hollow force
and inflict severe damage on the nation’s defense. Some have suggested moving more of the
cuts to the non-defense side of the ledger, a concept totally unacceptable to human needs
advocates who are equally concerned about sequestration cuts to non-defense discretionary
programs. The President shares Panetta’s concerns about sequestration but has said he would
veto attempts to alter sequestration by shifting cuts from military to non-military programs. He
would spare defense by making savings through revenue increases.

House and Senate Republicans have sponsored legislation to alter sequestration. Senator Jon Kyl
(R-AZ) has introduced the Down Payment to Protect National Security Act of 2012 (S. 2065)
that cancels the 2013 cuts requiring deeper cuts for 2014 through 2021. Bill sponsors claim that
the cost of delaying sequestration would be paid for by freezing the pay of federal workers for
two more years and cutting the federal workforce by 5 percent. However, the discretionary caps
already in place will likely mean cuts in the federal workforce anyway, so proposing such cuts
here is likely to be double-counting. An analysis by the Center on Budget and Policy Priorities
(“No Spending Cuts in 2013, But Bigger Cuts Later, Under Senate Proposal”, at
http://www.offthechartsblog.org/no-spending-cuts-in-2013-but-bigger-cuts-later-under-senateproposal/)
concludes that the legislation would result in a greater burden on non-defense
discretionary spending, requiring a cut of $48 billion each year rather than $38.6 billion under
current law. Defense cuts under S. 2065 would grow from $54.7 billion to $59.7 billion for the
8-year period. The end result of the Kyl bill is to shift the burden of cuts in sequestration from
military to domestic spending. Armed Services Committee Chairman Howard McKeon (R-CA)
has introduced similar legislation (H.R. 3662) in the House.

The President’s budget challenges Congress to generate a package of cuts before January to
eliminate the need for sequestration. There likely will not be a resolution until the post-election
lame duck session in November. The Bush-era tax cuts are set to expire at the end of the year,
putting trillions of dollars of potential deficit reduction in play. The President’s budget proposes
ending the Bush-era tax cuts that apply to income over $200,000/250,000 (individual/couple)
which would save $866 billion, and other revenue increases and spending cuts will be one option
to avert the sequester – an option Republicans and some Democrats in Congress will resist. The
stakes are high and the outcome will surely be influenced by the election results.

Posted by Sue Kirby on 02/21/12  •  Comments 0   •