October 25, 2014

Budget Process Is Answer to Sequestration Axe

Back in August of 2011, with the nation’s debt bumping up against its statutory limit and an election year looming, President Obama and Congress made a deal.

They would empower a special committee (the “super committee”) to reach a long-term budget deal worth $1.2 trillion to $1.5 trillion in deficit reduction and give that deal a fast-track path to enactment. All options for cutting spending or raising revenues would be on the table.

To provide an incentive, other than simply doing the right thing, they agreed that if the super committee failed, or if Congress rejected its plan, a fallback mechanism known as “sequestration” would initiate spending cuts worth $1.2 trillion from non-exempt programs over 10 years. Half of the cuts would come from defense spending and the other half from domestic programs. The idea was not to craft rational policy but to install a back-up so arbitrary that no one would want it to go into effect.

The deal provided a grace period throughout 2013 during which a more comprehensive plan could be reached, if the super committee failed.

Here we are, 18 months later, still awaiting a “grand bargain.” The committee failed to produce a plan, nothing has been done to replace the 2011 deal, and the sequester is now going into effect.

So be it. It’s true that the sequester is not good policy. As a matter of deficit reduction, it is ill-targeted because it hits the least problematic programs the hardest. It cuts indiscriminately across the board into appropriations programs that have already been capped at a very low level of growth and leaves the fastest growing programs largely untouched.  

According to CBO, over 70 percent of the cost savings from the sequester will come from discretionary spending. Defense spending is slated to fall to 2.8 percent of GDP, and non-defense discretionary to 2.7 percent of GDP, by 2023. Those would be historically low levels.

It requires nothing from the revenue side of the budget, even for “loophole closings” that both parties say they favor in theory.

And the sequester forces cuts that CBO estimates will reduce outlays by $42 billion this year, which will add to the “headwinds” against an economy struggling to regain its footing, according to Federal Reserve Board Chairman Ben Bernanke.

Yet, there are some silver linings to the mess of sequestration, not the least of which is political accountability.

A threat, such as sequestration, can only be effective if everyone understands that the consequences are real. The cuts may be ill-timed and arbitrary but they are what the President, the House and the Senate agreed would happen if they and their super committee kicked the can down the road. Shutting off the cuts now would be just another example of political expediency. No future back-up mechanism to achieve deficit reduction would be taken seriously.

Moreover, letting the cuts proceed is not the end of the story. Some may take it as a “victory” for spending cuts just as some took the fiscal cliff deal as a “victory” for higher taxes on those with upper incomes. But accepting all that, pressure will continue to build for a bigger and better budget agreement because the sequester leaves so much off the table.

Even with these cuts, which are assumed in the baseline, the budget would remain on an unsustainable course. At some point, a negotiation must occur on how to correct this. That negotiation should include all parts of the budget.  

The sequester is a reflection of politicians' unwillingness to grapple with the hardest of choices -- entitlement and tax reform. The default is always to cut discretionary spending, which is easier but far less effective as a means of putting the budget on a sustainable track.

So as the sequestration goes into effect, let's not be fooled that we're really tackling the problem. Elected officials still need to enact a plan that puts us on a sustainable course. And as the new Simpson-Bowles framework suggests, that plan still requires a mix of spending cuts and tax increases (preferably from reducing and eliminating tax expenditures).

The sequestration is simply one small part of a larger, ongoing story. It can be and should be replaced, but not until Republicans and Democrats can agree on something better.

The best opportunity to do that comes not with the threat of a government shutdown when funding runs out on March 27, or when the debt limit is again reached this summer, but through the regular budget process which will kick off later this month with the President’s budget proposal, and House and Senate action on budget resolutions. House Republicans will be able to present their own plan, as will Senate Democrats. Then we may see the real super committee at work -- a House-Senate conference committee on the joint budget resolution. That’s the best way to deal with the sequester and all the unfinished business it leaves untouched.