Revenue & Spending
White House and Federal Agencies Could Manage Effects of Automatic Spending Cuts in Early 2013
The White House and federal agencies have multiple tools to temporarily postpone most of the impacts of across-the-board spending cuts, known as "sequestration," scheduled to take place on Jan. 2, 2013, if budget talks during the congressional lame-duck session break down, according to a new OMB Watch analysis released Nov. 2.
The cuts were included as a backstop and enforcement mechanism in the Budget Control Act of 2011, which included $1.5 trillion in immediate spending cuts, but also directed Congress to enact another $1.2 trillion in deficit reduction measures by early 2012. If Congress failed, the Budget Control Act achieved the same $1.2 trillion in deficit reduction through across-the-board spending cuts, with $109 billion imposed in 2013 starting in January.
Sequestration was technically triggered when Congress failed to reach an agreement by Jan. 15, 2012, but because the cuts do not begin until 2013, Congress really has until the end of this year to enact new legislation that would cancel or delay the cuts. The chances of that happening, however, are decreasing by the day.
The odds of a budget impasse occurring if President Obama is reelected, and the House continues to be controlled by Republicans in a status-quo election, are high. The two sides are deeply divided over continuing Bush-era tax cuts for the wealthy. Reaching an agreement in November and December will be especially difficult. Republican leaders are unlikely to be able reach across the aisle when they are facing leadership elections in early January. Moreover, there may not be enough time to reach an agreement before the end of the year.
If sequestration occurred and lasted for the rest of the year, it could trigger a recession in early 2013, according to an August analysis by the nonpartisan Congressional Budget Office. Few budget analysts expect sequestration to last that long, however. A more likely outcome is that a budget deal would be struck in early 2013, a major component of which would be retroactive cancellation of sequestration.
A major reason for this is that the politics of reaching a balanced budget agreement become more favorable in January. Most Republicans (and a few Democrats) in Congress have signed a pledge issued by Americans for Tax Reform, an organization led by Grover Norquist, not to raise taxes. Before Jan. 1, any package that extended tax cuts for the middle class, but did not extend Bush-era tax cuts for the wealthiest Americans, would be labeled a tax increase. After Jan. 1, however, that same tax package would be a tax cut. Politically, it would be difficult to oppose a budget package in January that included tax cuts for middle- and working-class Americans and retroactively canceled sequestration.
A key question is: how would the executive branch handle a temporary sequester that lasted for a few weeks in January? One answer is that a substantial portion of federal spending is exempt from sequestration.
A partial list of exempt programs includes: Social Security benefits (old-age, survivors, and disability), all programs administered by the Department of Veterans Affairs (VA), military personnel spending (subject to the president's approval, which he has provided), interest on the federal debt, refundable tax credits, and a variety of low-income programs, including Temporary Assistance for Needy Families (TANF), food stamps (the Supplemental Nutrition Assistance Program, or SNAP) and child nutrition programs, mandatory funding under the Child Care and Development Fund, Medicaid, the Children's Health Insurance Program (CHIP), foster care, and the Supplemental Security Income (SSI) program. However, administrative expenses for these programs are subject to sequestration.
Still, many other programs would remain vulnerable to cuts ranging from eight to 10 percent, according to an early analysis released by the Office of Management and Budget (OMB) in September. Those cuts need not be imposed immediately, however.
According to OMB Watch's new analysis, the White House and executive branch agencies have the power to manage, mitigate, and postpone the negative effects of sequestration for several weeks if they choose. These strategies include:
- Controlling the Rate of Federal Spending: Once funds have been appropriated by Congress, it is up to the executive branch to decide how to spend that money throughout the year. OMB has authority, called apportionment, which enables it to accelerate spending for programs as needed in early 2013 to offset the impact of sequestration for a short period of time.
- Using Carryover Funds to Help Cushion the Impact: Federal agencies have the ability to manage their own finances to save money early in the year and carry those savings over to later in the year. Some federal programs, such as highway programs, have funds that they carry over from year to year that are not subject to sequestration that can help cushion the impact of a sequester for those programs.
- Redirecting Funds to More Urgent Program Activities Early in the Calendar Year: Federal agencies have limited authority to redirect cuts within their budgets away from sensitive areas of spending to other areas that may be less sensitive in the first few weeks of the year.
- Accelerating Funding to Avoid Federal Employee Furloughs and Layoffs: Military personnel are exempt from sequestration. For civilian personnel, Congress has given agencies authority to accelerate funding to prevent furloughs and reductions in force (RIFs).
- Delaying the Announcement of New Federal Contracts: Existing contracts are largely immune from sequestration, and the administration has indicated that it will work to minimize the effects on those existing contracts that may be affected. However, new contract announcements may be delayed at the beginning of 2013.
- Delaying the Announcement of New Federal Grants and Prioritizing Existing Grants: Existing grants carried over from 2012 are largely immune from sequestration. Continuation grants in 2013 may be affected at the time they come up for renewal, but they may be prioritized by federal agencies over new grant awards, which may be delayed until later in the year.
- Delaying Sequestration for Education Programs: Most education funding to the states (such as Title I) is advance-funded. The administration has already indicated that advance-funded education programs will not be affected by sequestration until July.
The administration's authority to mitigate sequestration is not unlimited. It depends on sequestration lasting a relatively short period of time – perhaps no more than a month – and on the president and Congress agreeing to cancel it retroactively to the beginning of the year.
Still, if it is triggered, the worst effects of sequestration may be avoided temporarily – long enough for Congress to consider alternatives to a bad budget deal forced upon them by unreasonable fears of what might happen on Jan. 2.