Congress has now turned its attention to the “Return of the Fiscal Cliff: Part 1—The Son of Sequester.”
Sequestration sounds like a really bad version of the flu bug, but instead it’s a really bad case of Congress and the president holding Damocles’ sword over their heads and arguing about who is to blame when the sword falls.
In its raw form, “sequester” refers to automatic spending cuts set to take effect in March, courtesy of the New Year’s Fiscal Cliff negotiations that merely postponed the across-the-board cuts.
Actually, the birth of sequester can be traced back to 2011, when President Obama and Congress agreed to a debt ceiling compromise. In that deal, a “supercommittee” was tasked to cut $1.5 trillion over the next decade, and Congress had to pass it by the end of that year.
If Congress didn’t arrive at the cuts, then the deal stipulated automatic cuts to the federal budget—but not all of the federal budget, just targeted areas.
If you imagine $1 of federal spending, a significant chunk of that $1 gord to just a few government programs: Social Security, Medicare, Medicaid, other safety net programs, and interest on the national debt. And unless Congress changes the law, these 60 cents of spending are mandatory.
So 60 cents of every dollar goes to a handful of programs and must be spent. That leaves 40 cents of what Congress basically bickers over, called “discretionary” spending. But within those 40 cents, 20 cents goes to discretionary defense spending.
So, the remaining two dimes worth out of every dollar spent goes to programs we normally associate with the federal government such as transportation, education, science and medical research, benefits for retirees and veterans, the national parks, various federal agencies and departments: in other words, basically what most Americans think of as the daily operations of the federal government.
Now, back to sequestering. If Congress fails to avoid these automatic cuts, then $1.1 trillion over the next 10 years are axed from a variety of programs, with slices from discretionary domestic and defense programs and mandatory spending.
According to an analysis by the Pew Trusts (Chart 8), the following areas would go under the budget knife:
So, $454 billion will be cut from defense spending, while $339 billion from mandatory spending and $294 billion from non-defense/domestic discretionary spending over the next 10 years.
Just the remainder of this year’s budget (until the end of September), defense cuts will be $42.7 billion, while another $28.7 billion in domestic discretionary spending and $9.9 billion in Medicare will be sliced.
Will this impact the economy? Most definitely. Do most politicians in Washington want to avoid this like the plague? Yes.
Will these same politicians do anything about it before it goes into effect? Most likely not.
Congress appears very willing to sit through this epic movie, only to get ready for part two of the “Return of the Fiscal Cliff” where the government’s budget authority for all federal spending this year runs out. Then there’s the third part of our fiscal triple-header, where the government hits up against the debt ceiling in May.
Of course, by that point, Congress most certainly will need another break from doing nothing.