Sequestration - CNBC Explains
Senior Editor, CNBC
Sequestration is a fiscal policy procedure adopted by Congress to deal with the federal budget deficit. In simple terms, it's a way of forcing cutbacks in spending on government programs and then using that money to pay down the deficit.
The deficit refers to the difference, in a single year, between government receipts and spending.
Sequestration is important because it was part of the 'fiscal cliff' -- avoided with a last minute deal -- that would have eliminated the Bush-era tax cuts while implementing across-the-board cuts, or sequestration, on certain federal programs and defense spending.
But sequestration is still in play on Capitol Hill. As of January 2013, Congress was unable to reach agreement on spending cuts, and the sequestration was delayed until March 2013 as part of the American Taxpayer Relief Act of 2012 -- the deal that avoided the full 'fiscal cliff.'
The delay until March was to give lawmakers more time to agree on which programs would actually receive spending cuts. The specter of harmful across-the-board cuts to defense and non-defense programs -- as part of the fiscal cliff -- was intended to drive both sides to compromise. Whether that compromised is reached by March is still up in the air.
As it stands now, the deficit reduction sequester is designed to enforce savings of $1.2 trillion through 2021. For 2013 and each year after that, it means roughly a $55 billion cut in defense and a $55 billion cut in non-defense spending.
Based on the calculations, spending on government programs will be reduced by $984 billion over that nine-year period. The remaining amount of savings -- to get to the $1.2 trillion -- will come from reduced debt services costs, like the amount due on the debt interest.
Which programs will be hit by sequestration?
The Department of Defense is the biggest 'loser' of any government department. It's estimated that the DoD would have to cut 11 percent of its budget each year to reach the $55 billion cuts.
The Defense Department would be able to shift funds "to ensure war fighting and critical military readiness capabilities were not degraded," but non-deployed units, equipment and facilities, and research and development efforts would all take a hit.
The cuts would affect all sorts of programs, according to the DoD, including research and development as well as cause a reduction in the number of government contracts awarded.
About 108,000 defense civilian employees could lose their jobs in 2013 if sequestration takes effect, according to a report by the Center for Strategic and Budgetary Assessments.
As it currently stands, the biggest non-defense programs that face cutbacks are: the Department of Educatio,n which will be hit with automatic across-the-board cuts ranging from 7.8 percent in 2013 to 5.5 percent in 2021.
The Department of Agriculture is another program where certain government subsidies to farmers and other agricultural programs could face cuts. Farm support programs comprise the largest component of the remaining mandatory spending subject to full sequestration, according to the U.S. House of Representatives Budget Committee.
Other areas of non-defense cuts are still to be determined. The program cuts and amounts could change as lawmakers talk, but the goal of $1.2 trillion in cuts has to be reached.
Which programs are exempt from sequestration?
The list is long which may make it difficult to reach an agreement between Republicans and Democrats. Among the programs currently exempt from being targeted for cutbacks are Social Security, Medicaid, Supplemental Nutrition Assistance Program (formerly called food stamps), Supplemental Security Income, and Temporary Assistance for Needy Families.
Also exempt are Pell grants, which are student loans, spending from most transportation trust funds (which support highways, mass transit, and airports), and all programs administered by the Department of Veterans Affairs. President Obama also exercised his discretion to exempt military personnel accounts for 2013.
Most of Medicare payments to providers are subject to sequestration but limited to a 2 percent reduction. (Some of Medicare is exempt, and a small portion is subject to the full sequester.)
Also on the list of exemptions: compensation of the current President -- as well as pensions of former presidents -- and payments to widows and heirs of deceased members of Congress.
Other exemptions include advances to the Unemployment Trust Fund and Other Funds, payment of Vietnam and USS Pueblo prisoner-of-war claims within the Salaries and Expenses, and the Vaccine Injury Compensation Program Trust Fund.
Is sequestration a new idea?
No. Sequestration first appeared in the Gramm-Rudman-Hollings Deficit Reduction Act of 1985.
The Reduction Act of 1985 aimed at cutting the budget deficit, which at the time was the largest in history, and provided for automatic spending cuts -- sequesters -- if the deficit exceeded a set of fixed deficit targets.
The act did provide -- for a year -- a balanced federal budget, meaning the government didn't spend more than the revenues it took in. But it failed to permanently keep budget deficits from growing.
What's the bottom line on the current sequestration?
While the money diverted might help reduce the government deficit, there are fears that drastic cuts in government spending could slow down U.S. economic growth.
A report by The Office of Budget and Management, which helps the President set the budget, says that if the sequestration were to occur, the actual results might differ based on changes in law and ongoing legal, budgetary, and technical analysis.
But the report leaves no question that the sequestration would be "deeply destructive to national security, domestic investments, and core government functions."
The Congressional Budget Office, which is non-partisan, says that non-defense funding in 2021 would represent 2.8 percent of gross domestic product (GDP), whereas such funding has averaged 4.1 percent of GDP during the past decade. A number of public advocacy groups have argued that major cuts to programs included under non-defense discretionary spending would harm low-income families.
As for lawmakers, Democrats are fighting to keep a strong limit on any cuts to non-defense spending, while Republicans would prefer cuts to come from the so called entitlements of Social Security and Medicare, Medicaid, and limiting the cuts on defense.
If no agreement is reached in March, the sequestration cuts outlined in the fiscal cliff deal are scheduled to go into effect.
