United States: Sequester Update - Cuts, Carve-Outs And Leverage

The sequester remains in the news, drawing attention most recently when sequester-induced furloughs of air traffic controllers led to airport backups. As calls for a solution to the sequester-induced air travel delays mounted, initial resistance from the White House and some in Congress wilted. But that wasn't the first "exception" made to the sequester—nearly a month earlier, as part of a Continuing Resolution to fund the ongoing operations of the government an amendment was passed to allow the first carve-out from sequester requirements. It was done for an agency of the US Department of Agriculture, to keep a full complement of meat inspectors on the job, even before the 30 day furlough notice period had run. These cuts in services should have surprised no one. After much debate over the sequester's likely impact, and the delay of its start until March 1, the sequester is simply doing the thing that everyone understood it would do—bringing cuts that have an impact on the delivery of services.

Even with widespread agreement that furloughs of air traffic controllers and meat inspectors could cause real problems, why was there opposition to moving program funds to solve those staffing shortages? Two reasons - first, the law under which the sequester was created forbids such discretionary changes; second, if the more painful or high-profile impacts of the sequester can be legislated away, the sequester begins to lose its power to shape the fiscal debate. Recall that when the sequester was first proposed, there was broad consensus that it would never be enacted because its impact would be so painful and indiscriminate. And again, when the sequester appeared to be imminent, President Obama and his allies took pains to point out that it would be painful; they even predicted flight delays and the possibility of idle meat packing plants.

The sequestration provisions were imposed to motivate Republicans and Democrats alike to reach a comprehensive budget agreement. The idea was that Republicans would be forced to accept additional revenue increases and Democrats would be forced to accept additional cuts to discretionary programs and/or entitlements, rather than live under the sequester, which would cut every discretionary program, and not in a targeted way. As it turned out, the President and the Congress overestimated the deterrent value of the sequester, and Republican leaders began to see advantage in allowing the sequester to happen. Now, the remaining leverage of the sequester stands to be further diminished if there are additional carve-outs.

Sequester Carve-Outs - More to Come?

Now that air traffic controllers and meat inspectors have been deemed important enough to be given relief from the sequester, others will line up to seek relief. Education? Medical research? Defense? Nutrition programs? It's not hard to imagine the arguments that will be made, and that at least some of them will be successful in persuading Congress and the President to go along. Many Democrats opposed the sequester more strongly than Republicans, who saw some fiscal and political appeal in it. But once it was in place, those Democrats felt it should be allowed to take its full course in cuts to popular programs, hoping to persuade the public that the sequester (and austerity generally) is a poor way to govern. Republicans generally have regarded these targeted exceptions to the sequester as a victory, particularly the air traffic controller fix, because it undermines the argument that the cuts of the sequester are arbitrary and poor policy. But many Republicans also are talking more lately about some kind of relief from the sequester for certain categories of defense spending.

As the impacts of the sequester become more pronounced, some Democrats concerned about programs like Head Start and others that serve children, the disabled or low income Americans are calling for carve-outs for some of those programs, arguing that those programs are as important as any that effect business travelers or the meat industry. To the extent that they or others succeed in gaining further carve-outs from the sequester, the result will be to undermine the effect of the sequester as a mechanism for fiscal discipline. Additional carve-outs will allow agencies to shift funding within program accounts and between different programs, and ultimately will ease or at least obscure the pain of the cuts most visible to the public.

Whatever carve-outs may come, they will allow movement of funds within significantly reduced accounts. The overall cuts will remain in place, and most agencies still will not be able to exercise much discretion as to how they are distributed. Democrats and their allies argue that these cuts will do insidious damage to the economy, slowly eliminating some jobs and preventing the creation of others. They declare that the removal from the economy of $85 billion in federal spending during the remainder of the fiscal year ($1.2 trillion over ten years) is certain to harm the recovery. For those Democrats, the chance to win that argument comes chiefly in the long term; for now Republicans are having the better of the sequester-related debate.

Back and forth sparring and occasional attempts to alter the sequester in some targeted way are likely to continue—and for some time. In the relatively near term, the FY 2014 Appropriations process will have to play out under lower sequester-imposed allocations for every appropriations bill (a total of $967 billion, down even from the current $984 billion.) Appropriators across the ideological spectrum are worried about that and unsure how they will spread the pain in a way that can gain enough votes for passage. And under current law, the sequester remains in place for ten years, or until Congress effectively repeals it.

The Sequester is Part of the Larger Fiscal Debate - Budget, Debt Ceiling, Tax Reform

While the details of the sequester-driven cuts have become a big issue for now, it should be recalled that the sequester was invented for use (or threatened use) as a tool in a broader effort toward some kind of fiscal bargain between the President and Republican leaders in Congress. They still have not struck that bargain, but they will have more opportunities to try, and soon.

The US faces its next debt ceiling deadline shortly, probably by late summer. This now-familiar ritual seems likely to spawn another standoff about revenues and entitlements, but things are a little different this year: the President has submitted a budget in which he makes some gestures of concession toward Republican concerns, the Senate actually has passed a budget and House Republicans have passed their own budget, authored primarily by Rep. Paul Ryan. The House and Senate proposals are vastly different, but together, they create an environment in which Congress will actually debate a budget plan. That process could potentially yield a budget resolution that would reach a conference committee and pass with some sort of compromise to address our long term fiscal health.

Republican leaders have also signaled that they are considering making a debt ceiling extension a part of the budget resolution. This would increase their leverage in budget negotiations on both fiscal and policy matters, including tax reform. At the same time, inclusion of the debt ceiling hike in a budget resolution potentially could remove the lingering threat of a default. (Note that a budget resolution can pass the Senate with only 51 votes.) While many Republicans in Congress remain committed to taking a hard line on extension of the debt limit, Republican leaders are concerned that they incur political damage each time they take that stance. However, a budget deal is hardly certain, and there remain many Republicans who are comfortable allowing the threat of default; some would welcome it as the sort of shock necessary to achieve real and lasting cuts in spending.

In the meantime, the sequester remains in place. Members of Congress likely will keep trying to carve out occasional exceptions from the sequester's requirements, especially where the cuts are painful to constituencies with the power and motivation to demand relief—this week it was business travelers; next week or next month it may be some other group. That chipping away at the reach of the sequester will continue unless and until Congress or (more likely) the President refuse to accept any more. They are being urged to take that politically painful stand in order to preserve the remaining power of the sequester to drive both sides to the fiscal negotiating table. The day-to-day focus on the details of the sequester's impact ultimately will be a part of the larger struggle to reach a deal on a long term fiscal approach that actually can become law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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