The new federal budget cycle begins on February 13, when President Obama will release his budget proposal for the fiscal year beginning next October 1.  He will adhere to the spending caps enacted in the Budget Control Act of 2011, which set maximum spending for annual defense and nondefense appropriations through FY 2021.  He will not make the further cuts that the law calls for:  about $110 billion in FY 2013 divided equally between defense and nondefense programs.   These extra automatic cuts were triggered when Congress failed to agree on a deficit reduction plan by the end of 2011, and are scheduled to begin in January 2013.  The President will urge Congress to pass an alternative deficit reduction plan so that the automatic cuts can be avoided (for 2013 estimated by the Congressional Budget Office at 10 percent of defense and 8.5 percent of nondefense appropriations, plus additional cuts primarily affecting Medicare).
If there are any members of Congress who want to see the automatic cuts take effect, they have not come forward.  The most vocal opponents have expressed concerns about the impact of the defense cuts.  Senators Kyl (R-AZ) and McCain (R-AZ), as well as Rep. McKeon (R-CA) have introduced the Down Payment to Protect National Security Act (S. 2065 and H.R. 3662), legislation to replace the first year of automatic cuts with savings from reducing the federal workforce by at least 5 percent and an extension of the current federal civilian pay freeze through 2014.   There is strong opposition to making deep cuts in the federal workforce, so this legislation will face steep barriers.

The President, and many Democrats in Congress, would prefer to replace the automatic cuts with a deficit reduction package that includes revenue increases.  Republicans have rejected most proposals to raise revenues, so the path to avoiding the auto-cuts is not at all clear.

Next FY 2013 Budget Steps?  Congress could outline alternative deficit reduction proposals in its FY 2013 Budget Resolution.  But Senate Majority Leader Reid (D-NV) said on February 3 that he would not bring up a Budget Resolution on the Senate floor.  The House is likely to pass its version of a FY 2013 Budget Resolution, and Senate Budget Committee Chair Kent Conrad (D-ND) wants to approve one in committee.  These two versions will offer stark differences, if they are similar to last year’s proposals.  And neither is likely to move spending or revenue choices that the House and Senate can agree on in an election year.

Congressional budget resolutions do not put forth complete budget detail similar to the multi-volume opus coming from the Obama Administration on February 13.  The Congressional resolution has one major task:  it sets appropriations totals, which are then divided up among the dozen appropriations committees.  But for the next decade, the annual work of the Budget Committees has been replaced by the spending caps set in the Budget Control Act.  While Congress could adopt a budget resolution that called upon tax-writing committees to recommend revenue increases and/or could recommend other forms of savings from committees with jurisdiction over Medicare, Medicaid, agricultural programs, or defense, to name a few, divisions in Congress make agreement over these options seem far-fetched.  With no need to set spending limits and little chance of agreement elsewhere, that doesn’t leave much room for budget action.

How the Auto-Cuts Work.    The Budget Control Act requires $1.2 trillion in deficit reduction over ten years (over and above almost a trillion dollars in appropriations cuts already set in motion through annual caps on spending).  Because Congress couldn’t agree on a plan, $492 billion will be cut from defense and another $492 billion from nondefense programs between FY 2013 and FY 2021, with the rest coming from reduced debt service.  In FY 2013, there will be automatic cuts in each program that is not exempt (called “sequestration”).  Appropriators have little choice about how the cuts will be applied.  They could increase the funding level for programs they want to protect, so that the automatic cuts will be applied to a higher number, but since there are already caps on spending, an increase in one program area means others must be cut more deeply.  For example, if Congress wanted to spare K-12 education from cuts by increasing appropriations for those programs in advance of the auto-cut, it would have to make deeper cuts in such programs as public health, medical research, or social services.

Sequestration, the automatic program-by-program cuts, only kicks in for FY 2013.  After that, the caps established for each of the next 9 years will be lowered, giving Congress the chance to decide how the reductions will be applied.  If Congress does not figure out an alternative to these cuts, discretionary (appropriated) spending will drop down to 5.6 percent of GDP in 2022, according to the Congressional Budget Office, a smaller proportion than in any of the past 50 years.

Although Congress and the White House do not like the automatic cuts barreling towards them, and are not planning budgets or appropriations that assume the cuts take effect, agreement on alternatives is still elusive.

Budget Rules.   House Budget Committee Chair Paul Ryan (R-WI) has introduced 10 bills making changes in the ways budgets are developed.  Some of the bills are starting to move through the House.  H.R. 3578, which passed in the House on February 3, would change the way CBO projects spending over time.  The bill would stop CBO from incorporating inflation increases into its baseline.  By taking inflation into account, CBO shows how much it costs each year to maintain the same purchasing power.  Preventing this adjustment to the baseline means that services will shrink each year unless Congress takes steps to increase funding.   Another rules change, legislation giving the President the authority to make line item vetoes, passed the House Rules Committee on February 1 by a voice vote (it was approved by the House Budget Committee in December).

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