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Wednesday, March 13, 2013

Sequester Cuts Take Effect


On Friday, March 1, President Obama signed an order required by law to set into motion the automatic federal government spending cuts known as the “sequester.” The cuts, affecting both defense and nondefense programs, could have sweeping effects across a variety of government services, although several key programs are exempt. This article examines how the sequester came into effect and reviews its defense and nondefense cuts

Sequester Background
The sequester stems from the Budget Control Act of 2011 (BCA). The Act, signed into law in August 2011, brought an end to the debt ceiling crisis and created the Joint Select Committee on Deficit Reduction, also known as the “super committee.”

If the super committee failed to produce budget deficit legislation by Nov. 23, 2011, the sequester was designed to make automatic cuts to mandatory spending (spending that’s required by laws other than discretionary appropriation acts) and discretionary appropriations that total $1.2 trillion for the period of 2013 to 2021.

The super committee did indeed fail to produce budget deficit legislation. As a result, the automatic cuts were scheduled to begin on Jan. 2, 2013. In a deal reached in part to avert the Fiscal Cliff, the American Taxpayer Relief Act of 2012 (ATRA) postponed these cuts until March 1. However, Congress and President Obama weren’t able to reach a deal by that date to address the sequester or further postpone the cuts, so the President signed the required order setting the cuts in motion.

The nonpartisan Congressional Budget Office estimates that the automatic cuts will reduce cash disbursements by $42 billion in fiscal year 2013 and that this year’s sequestration plus automatic spending reductions next year will reduce the deficit by $89 billion in fiscal year 2014.  Over a 10 year period, the cuts could total $1.2 trillion.

According to the BCA, half of the cuts must come from defense programs and half from nondefense programs. Certain programs, however, are exempt. Notably, the cuts are to be made across the board to nonexempt spending, regardless of individual programs’ merits.

Defense Spending
Discretionary defense spending, including weapon purchases, base operations and some Hurricane Sandy aid, is subject to the sequester. Almost every mandatory defense program is exempt, though. President Obama has indicated that he will also exempt military personnel spending.

Pay for civilian defense employees is subject to the sequester, but restrictions on cutting annual pay means the reductions must be taken in the form of attrition and/or furloughs. Because the Office of Personnel Management requires a minimum of 30 days’ notice before furloughs can occur, furloughs would not likely take effect until April 2013 at the earliest.

Nondefense Spending
Nondefense discretionary spending subject to sequester includes health care, housing, education, immigration enforcement, most emergency and disaster aid, and pay to federal government employees. Again, because of restrictions on cutting annual pay, the reductions must be taken through attrition and/or furloughs that require at least 30 days’ notice. Such furloughs may affect government services like airport security screenings, air traffic control, and law enforcement investigations and prosecution.

Significant exemptions from nondefense discretionary spending include Pell Grants and all nonadministrative Veterans Affairs funding.

Most nondefense mandatory spending is exempt, including Social Security, federal employee retirement benefits, veterans’ benefits, refundable tax credits (for example, the earned income tax credit and the child tax credit), Medicaid, the Children’s Health Insurance Program, standard unemployment insurance, Supplemental Nutrition Assistance Program (SNAP, or food stamps) and Temporary Assistance for Needy Families.

But programs such as farm subsidies, extended unemployment benefits, and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) are subject to sequester. Medicare spending is also subject to the sequester, but the cuts to providers may not exceed 2%. Medicare beneficiaries will see no direct cuts.

What’s Next?
As of this writing, the two sides seem deadlocked over the sequester cuts, with the Obama administration seeking a mix of spending cuts and new revenues and congressional Republicans holding firm on their demand for domestic spending cuts alone, with no tax increases or defense cuts. Specifically, President Obama has indicated that he’d like to see tax increases – including on the wealthy, coupled with eliminating existing tax loopholes. The Republicans, on the other hand, say that they’ve made all of the tax concessions that they are willing to make, as a part of the Fiscal Cliff deal.  If the sequester remains in place through the end of fiscal year 2013 (Sept. 30, 2013), the BCA’s spending caps for both defense and nondefense discretionary spending will drop even lower in fiscal year 2014.

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