The Sequestration Shuffle
There are two distinct parts of the fiscal cliff:
- Taxmaggedon – $494 billion in tax hikes next year
- Sequestration – $110 billion in spending cuts next year
Taxmaggedon has got all the publicity. Nobody likes their taxes raised. Sequestration has barely been mentioned. Sequestration, though, is by far the more important. It strikes at the core of the whole federal government spending mess.
How sequestration emerges from the fiscal cliff fix will reveal how serious Congress is about fiscal responsibility.
What is Sequestration?
Sequestration is when money is withheld “across the board” by the U.S. Treasury from Congressional budget appropriations to meet a legal spending limit triggering automatic spending cuts.
That’s a mouthful. It is figured as a percent of the budget appropriation.
Sequestration only happens when Congress can’t decide how to meet the legal spending limit on its own. In that case, the Treasury is required by law to “sequester” (withhold) appropriated funds from being spent after the limit is reached. When that happens the White House OMB makes the final call on the actual painful cuts made each year.
“Across the board”, however, doesn’t really mean “across the board”. Congress has altered the definition through exemptions. Social Security, for example, is one of the exemptions. So is Medicaid. There are others.
That means everyone else has to take up the slack and suffer higher spending cuts to meet the legal limit. No matter what, Congress limits sequestration cuts in Medicare to 2%.
Sequestration and the Fiscal Cliff
An indecisive Congress has failed to make required spending cuts, triggering sequestration starting on Fiscal Cliff Day, 1/1/2013.
It came out of the divisive debate over raising the debt ceiling by $2.1 trillion last year.
In this case, the spending cut is $1.2 trillion spread over 10 years. It averages 10% (or lower) yearly. It is part of the contentious Budget Control Act of 2011. The total cuts are evenly split between defense and everything else. According to the CBO it is roughly $55 billion/yr for defense and $55 billion/yr for everything else.
Of the $1.2 trillion, 18% of the cost ($216 billion) is assumed to come from savings in debt service costs (interest cost savings). That means Congress really has to cut $984 billion instead of $1.2 trillion.
Congress has never before allowed sequestration. In the past, its just been used as a threat to win political games. In the end, Congress has always simply raised its spending limit to avoid sequestration.
The lesson of history is that Congress will do it again. They will hope that nobody notices in all the hoopla over tax hikes.
Heck, the President proposed eliminating the debt ceiling permanently to avoid any future spending restrictions on the federal government. Bye-bye debt debates. Bye-bye sequestration.
It is a fitting irony that after last year’s debt deal debacle that we have already spent the $2.1 trillion Congress wanted before we’ve even started the spending cuts to help pay for it.
Should Congress once again quietly renege another debt deal then it will be proof positive that Congress will never, ever seriously reduce spending until forced to when outside lenders finally stop lending.