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 nondefense cuts can be made any way appropriators see fit, as long as they add up to the required amounts for defense and nondefense.

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.”)

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 “nonsecurity” 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 nonsecurity.  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 nondefense 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/nonsecurity 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 nondefense 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-senate-proposal/) concludes that the legislation would result in a greater burden on non-defensediscretionary 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.

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