US Budget Alert and Fiscal Cliff

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Special Update - Federal Shutdown Ends and Default Avoided, For Now…

Early October 18th, President Obama signed into law a measure that: (1) ends the federal shutdown and pulls the nation back from the brink of default; (2) temporarily funds the federal government through January 15, 2014 at the sequester-reduced levels in effect at the end of FY 2013; (3) temporarily suspends the debt ceiling through February 7, 2014 (although Treasury's cash management tools could push the debt ceiling into March 2014); and (4) provides retroactive back pay for federal workers furloughed during the shutdown. On the evening of October 17th, the Senate-brokered measure passed 81-18 and the House approved it 285-144.  Senate Appropriations Committee Summary

As part of the agreement, Congress will now convene a long-delayed House-Senate budget resolution conference in the hopes of agreeing on total appropriations levels for 2014 and 2015, discussing ways to avoid an automatic budget sequester in 2014 and future years, as well as entitlement and tax reforms in order to stabilize long-term U.S. debt.

However, we have low expectations for the budget conference. The House and Senate negotiators face the same hurdles that have stymied Congress since the “Super Committee” failed two years ago:  Democrats generally are resistant to significant entitlement cuts, want the automatic sequester cuts in defense and nondefense spending canceled, and want additional revenues;  and Republicans are generally resistant to additional revenues, want to stick with currently required sequester cuts (although shifting the impact from defense to nondefense), and generally favor significant entitlement cuts. Failure to bridge these longstanding differences could possibly lead to another funding impasse in 3 months and the threat of default in 4 months -- although we believe a continuation of current funding levels through 2014 is more likely than another shutdown.

As the President insisted, the October agreement does not include any changes to Obamacare except for a provision to strengthen verification of household income for purposes of insurance subsidies. 


FY 2014 Funding and the Budget Negotiations.--With no appropriations having passed Congress for FY 2014 due to disagreements over funding levels, the government shut down September 30th at midnight due to the absence of a temporary funding measure (known as a CR or "continuing resolution").

President Obama asked for a "clean" CR (without any amendments) but House Republicans initially insisted on including amendments to de-fund or delay Obamacare and other amendments. The October 17th agreement funds the government through January 15, 2014.

Democrats and Republicans remain at a serious impasse on annual appropriations for Fiscal Year 2014 that fund most federal agency operations -- including national defense; homeland security; veterans healthcare; law enforcement; construction of airports, highways, and bridges; disaster relief; food, drug and water inspection; college aid; education for disabled children; low-income food, energy, housing and education assistance; and medical research. (FY 2014 began on October 1, 2013).

The impasse was underscored on July 31, 2013 when House leadership had to pull the Transportation-HUD (housing) appropriations bill off the House Floor due to lack of support, prompting Appropriations Committee Chairman Harold Rogers to say, "I believe that the House has made its choice: sequestration – and its unrealistic and ill-conceived discretionary cuts – must be brought to an end....The House, Senate and White House must come together as soon as possible on a comprehensive compromise that repeals sequestration, takes the nation off this lurching path from fiscal crisis to fiscal crisis, reduces our deficits and debt, and provides a realistic topline discretionary spending level to fund the government in a responsible – and attainable – way.”

The House Republican '14 budget resolution aims for $967 billion in total discretionary spending for 2014, which assumes full implementation of the automatic cuts required by the Budget Control Act of 2011. (This is generally referred to as the 2014 post-sequester level.)

Democrats, however, generally support a budget that replaces sequestration with a broader budget deal that funds discretionary programs at the "pre-sequester" level of $1.058 trillion.

The House and Senate budget plans are therefore $91 billion apart on total (defense and non-defense) discretionary appropriations for 2014.

Additional complicating factor: House Republican leaders want to shift all of the automatic cuts from defense programs to nondefense programs -- a departure from the Budget Control Act of 2011 which divides the automatic cuts equally between defense and non-defense programs.

New! Link here to a table showing the impact of the automatic cuts, year-by-year

Debt Ceiling.--Separate and apart from the federal government running out of appropriated funds, Treasury's authority to borrow funds came close to running out on October 17, 2013. Without a suspension or increase of the debt ceiling, Treasury would have lacked authority after October 17 to borrow funds to meet cash requirements for debt service, benefit payments and government operations. The October 17 agreement effectively allows Treasury to borrow funds to fulfill U.S. commitments into March of 2014.

Automatic Cuts & Sequestration.--In the absence of a bipartisan budget deal, the law requires OMB to impose, following Congress' adjournment, across-the-board cuts of $55 billion in defense spending and $37 billion in non-defense spending compared to the "pre-sequester" levels. Click her to see the pre- and post-sequester spending levels. in addition, a 2 percent cut will be applied to Medicare and a uniform percentage reduction computed by the Office of Management and Budget (OMB) will be applied to other non-exempt mandatory (entitlement) programs to bring total non-defense cuts up to $55 billion. Click here for an explanation of when the 2014 sequester takes effect.)

Link here to USBudgetAlert's new "Sequester" page for further details


Expiring Tax Provisions and Tax Reform.--Tax is another big piece of the fiscal puzzle this fall. Numerous broadly supported tax provisions are expiring in 2013 including: the deduction for state and local taxes, the R&D tax credit; the work opportunity tax credit; enhanced expensing for small businesses; the renewable energy production tax credit; and the tax deduction for energy-efficient commercial buildings. CRS Report detailing expiring provisions.

Chairman Camp at the House Ways & Means Committee and Chairman Baucus at Senate Finance over the summer had stated their intentions to mark-up major tax reform legislation this fall aimed at simplifying the code and lowering tax rates using revenues from eliminating numerous tax deductions and credits, however those mark-ups are now on hold pending the House-Senate budget resolution negotiations.

While there is broad agreement on reducing the corporate income tax rate from 35% to somewhere in the range of 25 to 28 percent (to bring it more in line with other OECD countries), there is strong disagreement between Democrats and Republicans on several key issues:


Back to top: Analysis of The Coming Fiscal Storm

October 31, 2013: In a rare, joint letter Chairman Harold Rogers (K-Ky) and Chairwoman Barbara Mikulski (D-Md), of the House and Senate Appropriations Committees, respectively, asked the leaders of the ongoing budget conference to settle on a topline appropriations number for 2014 before Thanksgiving, but certainly no later than December 2d. The two chairs said, "we believe that if an agreement on a discretionary spending number can be reached early, it will allow for more thoughtful and responsible spending decisions." Text of Appropriations Letter However, the House and Senate budget plans for FY 2014 are far apart -- $91 billion -- on their funding levels for 2014.

October 24, 2013: Asked about potential entitlement reforms in the budget resolution negotiations, Senate Majority Leader Harry Reid told Nevada Radio Station KNPR, "That is not going to happen this time. There is not going to be a grand bargain. What we need to do together to come up with something to get out of this senseless sequestration...."

Nonpartisan Congressional Budget Office report finds less budget savings than previously estimated from raising the Medicare eligibility age.

October 23, 2013: Republicans on the House Armed Services Committee sent a letter to the budget conferees calling for repeal of the automatic sequester cuts on defense spending -- which are currently in place for each year through 2021.

October 18, 2013: Early October 18th, President Obama signed into law a measure that: (1) ends the federal shutdown and pulls the nation back from the brink of default; (2) temporarily funds the federal government through January 15, 2014 at the sequester-reduced levels in effect at the end of FY 2013; and (3) temporarily suspends the debt ceiling through February 7, 2014 (although Treasury's cash management tools could push the debt ceiling into March 2014); and (4) provides retroactive back pay for federal workers furloughed during the shutdown. On the evening of October 17th, the Senate-brokered measure passed 81-18 and the House approved it 285-144.  Senate Appropriations Committee Summary

As part of the agreement, congressional leaders also agreed to convene a long-delayed House-Senate budget resolution conference in the hopes of agreeing on total appropriations levels for 2014 and 2015, and developing a package of entitlement and tax reforms in order to stabilize long-term U.S. debt. However, Budget Alert has low expectations for the conference as explained above.

October 5, 2013: New York Times reports that the strategy to force the de-funding of Obamacare by shutting down the government was months in the planning.

October 3, 2013: Treasury Dept. released a report warning, "a default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse."

October 1, 2013: Government Shutdown.--With no appropriations having passed Congress for FY 2014 due to disagreements over funding levels, the government shutdown Monday at midnight due to the absence of a temporary funding measure (known as a CR or "continuing resolution").

President Obama has asked for a "clean" CR (without any amendments) but House Republicans have insisted on including amendments to de-fund or delay Obamacare.

September 28, 2013: Saturday night the House sent to the Senate a CR (HJRes 59) that would fund the government through November 15th but delay ObamaCare for a year -- a measure the Senate is certain to reject on Monday, with the government heading towards a midnight Monday shutdown.

September 26, 2013: Congressional Budget Office Director Douglas Elmendorf said in a September 26, 2013 letter that “eliminating the automatic spending reductions specified in the Budget Control Act beginning in fiscal year 2014 would increase real gross domestic product (or GDP adjusted for inflation) by 0.5 percent and increase fulltime-equivalent employment by 600,000 relative to the amounts under current law.”   Eliminating the sequester, at least for the next couple years (it is currently slated to occur automatically in each year through 2021) is a key priority of Senate Democrats in the appropriations impasse that has held up FY 2014 spending bills. The major demand on the Republican side in the spending bill impasse has been de-funding or delaying Obamacare.

September 23, 2013: Senate Budget Committee Chairman Patty Murray (D-WA) and Senate Finance Committee Chairman Max Baucus (D-MT) released a joint letter to Senate Democrats making the case for a clean debt limit bill.

September 18, 2013: As reported by BNA, Treasury Secretary Lew said, "we're happy to do comprehensive tax reform with a revenue target that's part of a fiscal frame. We're happy to work on business tax reform that uses the one-time saving to help build the foundation for economic growth in this country," referring to an earlier proposal made by the Administration.

September 17, 2013: The nonpartisan Congressional Budget Office (CBO) releases The 2013 Long-Term Budget Outlook. Key findings and projections: "Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar. Federal debt held by the public is now about 73 percent of the economy’s annual output, or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percentage at the end of 2007. If current laws generally remained in place, federal debt held by the public would decline slightly relative to GDP over the next several years, CBO projects. After that, however, growing deficits would ultimately push debt back above its current high level. CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038....Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely.....

"Budget deficits would gradually rise again....mainly because of increasing interest costs and growing spending for Social Security and the government’s major health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies to be provided through health insurance exchanges)....The pressures of an aging population, rising health care costs, and an expansion of federal subsidies for health insurance would cause spending for some of the largest federal programs to increase relative to GDP. By 2023, CBO projects, the budget deficit would grow to almost 3½ percent of GDP under current law, and federal debt held by the public would equal 71 percent of GDP and would be on an upward trajectory.

"How long the nation could sustain such growth in federal debt is impossible to predict with any confidence. At some point, investors would begin to doubt the government’s willingness or ability to pay U.S. debt obligations, making it more difficult or more expensive for the government to borrow money. Moreover, even before that point was reached, the high and rising amount of debt that CBO projects under the extended baseline would have significant negative consequences for both the economy and the federal budget:

September 12, 2013: Congressional Budget Office (CBO) Director Doug Elmendorf says that although "the federal budget deficit has fallen faster than we expected a few years ago....the debt remains relatively high and is on an upward trajectory in the second half of the coming decade....The fundamental federal budgetary challenge has hardly been addressed: The largest federal programs are becoming much more expansive because of the retirement of the baby boomers and the rising costs of health care, so we need to cut back on those programs, increase the tax revenue to pay for them, or take some combination of those actions." Link to Elmendorf's slide presentation, "The Deficit is Down but the Fundamental Challenge Remains."

September 10. 2013: House Appropriations Chairman Rogers (R-Ky) released a draft fiscal 2014 continuing resolution reflecting an annual level of $986 billion -- roughly the same as the current 2013 "sequestered" spending level.

August 29, 2013: Washington Post releases the first-ever detailed look at the U.S. intelligence budget.

August 26, 2013: Treasury Secretary Lew, in a letter to Speaker Boehner, said that measures to avoid breaching the debt ceiling are now projected to run out in mid-October -- sooner than the earlier projections of November.

Meanwhile, the gridlock continues: White House press secretary Jay Carney reiterated,"We will not negotiate with Republicans in Congress over Congress' responsibility to pay the bills that Congress has racked up, period." However, that evening, Speaker Boehner reiterated his intention to use the debt ceiling to gain political leverage and demand "cuts and reforms that are greater than the increase in the debt limit." Link to NYTimes article

In a nutshell, Democrats don't want to a repeat of 2011 when they offered up a 10-year sequester in exchange for raising the debt ceiling, while House Republicans are planning for a reprise of 2011 by demanding entitlement cuts in exchange for raising the debt limit.

August 21, 2013: With impending mark-ups this fall of tax reform legislation, the Committee for a Responsible Federal Budget began a series analyzing the $1.3 trillion of tax expenditures (credits, deductions, exclusions and other preferences). Link here.

August 20, 2013: The required OMB Sequestration Update Report to the President and Congress for FY 2014 was released. No surprises.

Enactment of the House-passed defense bill would trigger $48 billion in automatic across-the-board cuts since the House chose to ignore the statutory defense cap for 2014 and instead shifts nearly all the defense cuts onto non-defense programs.

Similarly, enactment of the defense bill passed by the Senate Appropriations Committee would trigger $54 billion in across-the-board defense cuts because the appropriators chose to "assume" that a bipartisan budget deal would be enacted to entirely eliminate the automatic cuts.

The House-proposed non-defense spending bills would not trigger any across-the-board cuts because the House proposes non-defense levels that are even further below the levels required by the Budget Control Act (in order to absorb all of the defense cuts.)

However, the Senate Appropriations Committee proposed non-defense levels that would trigger $34 billion in across-the-board spending cuts because the Senate appropriators chose to assume enactment of a new budget deal that does away with the reduced spending caps required by the 2011 Budget Agreement.

August 13, 2013: Chief judges of 87 district courts in the U.S. send a letter to Congress "to express our grave concern over the impact the flat funding of the last few years, followed by sequestration, is having on the Judiciary's ability to carry out its...responsibilities....(Funding reductions) have forced us to slash our operations to the bone...." The judges noted serious concerns about putting public safety at risk due to reductions in law enforcement officers, as well as security at courthouses and funding for public defenders. The judges concluded that "another round of cuts would be devastating."

August 8, 2013: Congressional Quarterly reports the President will again exercise his authority to exempt military personnel from automatic across-the-board spending cuts (sequestration) in FY 2014. The across-the-board cuts will occur if Congress and the Administration cannot find an alternative approach to comply with the required $55 billion in defense spending cuts for FY 2014 mandated by the Budget Control Act of 2011. With all military personnel exempted, the percentage reduction in all non-personnel defense accounts (such as operations and maintenance, and weapons) will have to be significantly higher. The President made the same exemption in FY 2013.

August 6, 2013: CBO releases sequester update report which states, in part, "With the automatic reductions in the caps mandated by the Budget Control Act of 2011 (and modified by the American Taxpayer Relief Act), the overall limit on discretionary budget authority will be $967 billion in 2014.

August 1, 2013: A vote to move forward with the Senate's version of the Transportation-HUD bill fell 6 votes short of the required 60 votes to avoid a filibuster, as Senate Republican leaders rejected any attempt to back away from the deep budget cuts required by the 2014 sequester. The frustrated chair of the Transportation-HUD subcommittee, Senator Patty Murray, said Republicans "have so forcefully fought for the tea party agenda, arguing that there is not one good dime spent at the federal level, that they don't know how to get off that and move to compromise."

July 31, 2013: In a significant development which may force the beginning of serious budget negotiations in September, House Republican leaders were forced to pull the FY 2014 Transportation-HUD spending bill off the House Floor when it became apparent they lacked the votes for passage.

This reflects a deep rift within House Republican ranks between: (1) those who support the shifting of all 2014 automatic sequester cuts from defense programs onto non-defense programs; and (2) Members of the Appropriations Committee led by Chairman Harold Rogers, R-KY, who believe the cuts are too severe and want to negotiate a broader budget plan to replace the 2014 sequester.

In his statement, Chairman Rogers said: “The Transportation, and Housing and Urban Development funding bill that was pulled from floor consideration today was the first major attempt by the House to consider and pass an Appropriations bill that funds domestic programs under the austere level delineated under the Budget Control Act and the House budget resolution....Thus, I believe that the House has made its choice: sequestration – and its unrealistic and ill-conceived discretionary cuts – must be brought to an end. And, it is also clear that the higher funding levels advocated by the Senate are also simply not achievable in this Congress.... Spending reductions in mandatory and entitlement programs, which are the drivers of our deficits and debt, are the most effective way to enact meaningful change in the trajectory of federal spending. The House, Senate and White House must come together as soon as possible on a comprehensive compromise that repeals sequestration, takes the nation off this lurching path from fiscal crisis to fiscal crisis, reduces our deficits and debt, and provides a realistic topline discretionary spending level to fund the government in a responsible – and attainable – way.” (emphasis added) Link to Chairman Rogers' full statement

House Ways & Means Chairman Camp announced plans to markup a tax reform bill in October, reports Politico.

Joint Committee on Taxation study estimates that eliminating the AMT and reducing top individual and corporate income tax rates to 25 percent -- as proposed in the House-passed budget resolution --would cut revenues (and increase deficits) by $5 trillion unless offset by eliminating $5 trillion of deductions, credits and other tax preferences.
Link to estimates on individual rates
Link to estimates on corporate rates.

July 30, 2013: Obama’s plan to link corporate tax reform, jobs spending quickly rejected by GOP. White House fact sheet.

July 25, 2013: CBO analysis projects that canceling automatic "sequester" cuts for the rest of this year and next year would add almost a million jobs.

As reported by Bloomberg/BNA, Senate Majority Leader Reid says that legislation to rewrite the tax code should raise at least $975 billion in revenue.

June 20, 2013: Senate Appropriations Committee Democrats and 5 committee Republicans voted to urge that a budget resolution House-Senate conference move forward. According to Congressional Quarterly, House Budget Chairman Paul Ryan (R-WI) says he first wants to reach agreement with Senate Budget Chair Patty Murray (D-WA) on a framework for compromise before launching negotiations. Murray wants to proceed without a framework.

March 21, 2013: Boehner backs away from a debt ceiling fight in May but says the sequester will remain in place unless Democrats agree to entitlement reform and a balanced budget. As reported by Congressional Quarterly, Speaker John Boehner said the May expiration of the temporary debt ceiling increase might provide "some" leverage to Republicans to force spending cuts, "but I'm not going to risk the full faith and credit of the federal government." He added, "We've made clear that to get rid of the sequester, we need cuts and reforms that will put us on a path to balance the budget over 10 years. The president is clear that he's not going to address our entitlement crisis unless we're willing to raise taxes. I think the tax issue's been resolved. So at this point in time, I don't know how we go forward."

March 21, 2013: Congress completes action on a funding bill for the remainder of FY 2013, averting a government shutdown. Click on FY'13-'14 button, above, for latest news

March 21, 2013: House adopts H.Con.Res. 25, the FY 2014 budget resolution (H.Con.Res. 25), although the spending framework -- which requires Senate concurrence -- is vastly different from the Senate Democratic plan. The vote was party line except for 10 GOP "no" votes. The plan would repeal the scheduled FY 2014 sequester cuts to the defense budget and shift them to non-defense discretionary programs. This would constitute a third major round of cuts in non-defense discretionary programs -- the first imposed by the 2011 Budget Control Act in the form of annual spending caps through 2021; the second imposed by budget sequestration, which automatically cuts $109 billion per year in each year through 2021; and the third imposed by shifting the FY 2014 defense sequester to non-defense programs. The budget plan also calls for repeal of the Affordable Care Act and tax reform. House Republican summary

May 14, 2013: CBO releases new projections for 2013 -2023 projecting that the budget deficit "will shrink this year to $642 billion, the smallest shortfall since 2008. Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP. Because revenues, under current law, are projected to rise more rapidly than spending in the next two years, deficits in CBO’s baseline projections continue to shrink, falling to 2.1 percent of GDP by 2015."

However, CBO goes on to underscore that the nation still faces a long-term debt crisis: "Budget shortfalls are projected to increase later in the coming decade, reaching 3.5 percent of GDP in 2023, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal 2023, if current laws remain in place, debt will equal 74 percent of GDP and continue to be on an upward path"

March 1, 2013: As reported by Congressional Quarterly the President has dismissed the option of using the funding bill for the remainder of 2013 as a vehicle to un-wind the sequester. According to CQ, the President said he would not veto a stopgap funding bill that complies with the 2013 discretionary spending caps, as further reduced by the sequester.“If we stick to that deal, then I will be supportive of us sticking to that deal,” Obama said at a White House news conference. The cuts under sequester, he said, “are additional cuts on top of that, and by law, until Congress takes the sequester away, we’d have to abide by those additional cuts, but there’s no reason why we should have another crisis by shutting the government down in addition to these arbitrary spending cuts,” Obama said. “If the bill that arrives on my desk is reflective of the commitments that we previously made, then obviously I would sign it,” he added.

March 1, 2013: OMB sequestration report to Congress. President's sequester order.

FY '13 Sequester Facts:

February 28, 2013: Senate failed to pass both Democratic and Republican alternatives to the $85 billion March 1 sequester. The Democratic bill would have replaced the cuts with a combination of a minimum 30% tax on millionaires and cuts to defense and farm programs. The Republican bill would have given the President some flexibility to re-target the $85 billion in cuts instead of the current across-the-board formulation.

February 28, 2013: Five myths about the sequester (Norm Ornstein of AEI and Thomas Mann of Brookings

February 26, 2013: Fed Chairman Ben Bernanke told Congress the sequester would place a significant burden on the economy. He urged Congress to replace the cuts with more gradual long-term deficit reduction. "To address both the near- and longer-term issues, the Congress and the administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run."

February 22, 2013: White House releases state-by-state impact of sequestration spending cuts.

February 20, 2013: Pentagon letter informing Congress of potential furloughs.

February 14, 2013: Senate appropriations committee releases agency letters summarizing the projected impacts of sequestration on government operations and services.

February 13, 2013: House Appropriations Committee Democrats release sequester projections.

February 7, 2013: CRS releases report on the debt ceiling, scheduled to expire in mid-May.

February 5, 2013: CBO annual report projects low growth in 2013 of just 1.4%, due in part to automatic cuts scheduled to take effect on March 1, 2013. CBO's overall projection: "Economic growth will remain slow this year, CBO anticipates, as gradual improvement in many of the forces that drive the economy is offset by the effects of budgetary changes that are scheduled to occur under current law (the automatic cuts described above). After this year, economic growth will speed up, CBO projects, causing the unemployment rate to decline and inflation and interest rates to eventually rise from their current low levels. Nevertheless, the unemployment rate is expected to remain above 7½ percent through next year; if that happens, 2014 will be the sixth consecutive year with unemployment exceeding 7½ percent of the labor force—the longest such period in the past 70 years."

February 4, 2013: The President signed on Monday, February 4, 2013 a short-term suspension of the debt ceiling – but only through May 18, 2013.  The short-term measure, crafted by the House, is aimed at pressuring the Senate to pass a Budget Resolution this spring that addresses entitlement reform. Because the measure is short-term, the nation will again face the threat of default in May(similar to the summer of 2011).

January 23, 2013: House passed debt legislation (HR 325) that would suspend the debt limit through May 18, 2013 and would delay paying Members of Congress if either chamber fails to pass a Budget Resolution (general budget plan for FY 2014, which begins October 1.). The no-budget / no-pay provision is very likely unconstitutional because the the 27th Amendment to the Constitution provides that "no law, varying the compensation for the services of the Senators and Representatives, shall take effect, until an election of Representatives shall have intervened." However, that issue is unlikely to ever be adjudicated since the Senate is likely to pass a Budget Resolution this April -- for the first time since 2009. (Go to FY'13-'14 page for more news on the budget.)

In the meantime, a February battle over the debt ceiling appears to have been averted, although the nation still faces automatic across-the-board budget cuts on March 1 and a potential government shutdown at the end of March due to the expiration of funding authority on March 27. In addition, the new May deadline for the debt ceiling is not far behind. Republicans and Democrats remain far apart on what they believe spending levels should be for the remainder of FY '13 and FY '14.

January 17, 2013: In the wake of assertions by some fiscal conservatives that simple "prioritization" of government payments could enable Treasury to operate after the debt ceiling is reached, a bipartisan analysis concludes that (1) choosing to pay some and not other commitments would be of "questionable legality and may not even be practical"; and (2) delaying each day's millions of disbursements until sufficient revenues come in would quickly result in intolerable payment delays: Feb. 15 military pay and unemployment benefits would be delayed 5 days; Feb. 20 Social Security payments would be delayed 5 days; Feb. 25 food stamp payments would be delayed to March 5; March 1 Social Security and veterans benefit payments would be delayed to March 15, with each delay getting longer.

January 14, 2013: President Obama appears to rule out a deal trading more spending cuts for increasing the debt ceiling. Congressional Quarterly reports that "President Barack Obama set a hard line on Monday against negotiations over raising the federal borrowing limits, saying if the debt ceiling is not raised Social Security checks and veterans’ benefits payments 'will be delayed' and that federal obligations such as payments to troops may be threatened ....Obama told House Republicans he will not treat 'the full faith and credit of the United States' as a bargaining chip in deficit reduction talks. Republicans, he said, 'will not collect a ransom for not crashing the economy.'" On January 12, 2013 the White House ruled out using the "trillion dollar platinum coin" loophole to avoid exceeding the debt ceiling.

January 11, 2013: Letter from Senate Democratic leaders urge President to take any lawful steps to avoid a the debt ceiling being used as political leverage.

January 10, 2013: Debt ceiling will likely need to be addressed in the latter half of February. Debt ceiling FAQs from Jeanne Sahadi

January 9, 2013: A new report from the nonpartisan congressional research service concludes that even after the fiscal cliff deal, half of the contractionary effects remain due to expiration of the payroll tax cuts, higher taxes on high-income individuals, tax increases enacted as part of health reform, the remaining automatic budget cuts now scheduled for March 1, 2013 and other effects. The combined effects could contract economic growth by 2 percent.

January 4, 2013: Nonpartisan congressional research service summary of the fiscal cliff deal.

January 2, 2013: President Obama signed into law the "American Taxpayer Relief Act of 2012" (ATRA) which, in general permanently extended the Bush tax cuts for most taxpayers, allowed expiration of the payroll tax cut, delayed automatic spending cuts "sequestration" for two months, and extended expiring unemployment insurance for one year.

How does budget sequestration work?
OMB Sequester Report (09.14.12)
Budget Control Act of 2011: Effects on Spending and the Deficit

Budget “Sequestration” and Selected Program Exemptions and Special Rules

CRS summary of the fiscal cliff agreement

Highlights of the 01/01/13 Fiscal Cliff Agreement:

December 21, 2012: President Obama proposes a stop-gap measure that would extend current tax rates for income up to $250,000, an extension of expiring unemployment benefits, and a delay in the sequester (automatic spending cuts.

December negotiations: Link to Comparison of Obama and Boehner Proposals

November 30, 2012: Washington Post reports that House Speaker Boehner sees fiscal cliff talks at "stalemate."

November 28, 2012: The Tax Policy Center has created a new Tax Calculator that lets users examine the effects of fourt potential outcomes of negotiations over the upcoming fiscal cliff.

Norquist backing away from "the pledge" may signal less pressure on Republicans to stand firm on tax rates.

November 26, 2012: The White House released a report Nov. 26 finding that real gross domestic product could decline by 1.4 percentage points if tax rates on the middle class return next year to their pre-Bush-era levels.

November 23, 2012: Business groups call for raising debt ceiling as part of fiscal cliff fix.

November 21, 2012: Senators Michael Bennett (D-Colo.) and Lamar Alexander (R-Tenn) propose a "plan" to avoid the fiscal cliff, although the plan still lacks critical details, such as the composition of automatic spending cuts and tax increases that would go into effect in the event Congress fails to enact deficit reduction legislation in 2013. Other plans to avoid the fiscal cliff include one proposed by the Bipartisan Policy Center, although it similarly avoids details on a fiscal "backstop" if Congress fails to act.

November 20, 2012: Federal Reserve Chairman Bernanke again warned policymakers to avoid "a sudden and severe contraction in fiscal policy early next year."

Tax Policy Center estimates raising the $250,000 threshold to $500,000 would cost $7 biillion in revenue losses; and raising the threshold to $1 million would cost $14 billion in revenue losses.

November 17, 2012: AP reports Senate Majority Leader Harry Reid may be taking off the table a key proposal in fiscal cliff talks. The proposal would adopt a more accurate method (according to economists) of calculating cost of living adjustments (COLAs) for Social Security and a host of other federal programs. The adjustment would take into account that consumers find less expensive alternatives when prices rise. Some have proposed that making this technical change in COLAs could be a relatively noncontroversial "downpayment" on deficit reduction as part of a fiscal cliff deal. However, AP reports Reid saying the following: "I've made it very clear. I've told anyone that will listen, including everyone in the White House, including the president, that I am not going to be part of having Social Security as part of these talks relating to this deficit." Whether Reid's statement covers the technical adjustment to Social Security COLA calculations is not yet clear.

November 16, 2012: CNN Money reports that the Treasury Department will face a difficult choice on tax withholding if the nation goes over the fiscal cliff on January 1, 2013. Also, as reported by the Fiscal Times, a Goldman Sachs analysis speculates there may still be a $218 billion hit on the economy even if there's a "fiscal cliff deal," due to expiration of the payroll tax cut, expiration of upper income tax cuts, health reform tax increases, and expiration of emergency unemployment benefits.

November 13, 2012: In a letter on Fiscal Cliff preparations, IRS warns Congress of higher tax bills and filing delays for millions of taxpayers due to expiration of AMT (Alternative Minimum Tax) patch.

Post-Pew poll shows deep public anxiety over the fiscal cliff, with GOP more likely to be blamed.

November 8, 2012: In an updated report on the economic consequences of the fiscal cliff, the nonpartisan Congressional Budget Office concludes "if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in the first half of the year.... That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013."

However, CBO reminds us that if the fiscal cliff is removed without substituting a broader debt reduction deal, "a continued surge in federal debt during the rest of this decade and beyond would raise the risk of a fiscal crisis in which the government would lose the ability to borrow money at affordable interest rates...."

October 25, 2012: The "Campaign to Fix the Debt" rang the opening bell at the New York Stock Exchange on October 25. According to Congressional Quarterly, "several of the business leaders who spoke Thursday...said uncertainty caused by the so-called fiscal cliff and the rising $16 trillion debt is holding back economic growth and hiring."

October 23, 2012: Committee for a Responsible Federal Budget reports that the fiscal cliff has now overtaken Europe's debt crisis as the number one concern for investors.

October 22, 2012: In the final presidential debate of 2012, while responding to Governor Romney's comments on defense cuts, President Obama said, "first of all, the sequester is not something that I've proposed. It is something that Congress has proposed. It will not happen. The budget that we are talking about is not reducing our military spending. It is maintaining it." Transcript

President Obama was speaking about his FY 2013 budget proposal. By way of background, defense outlays in 2001 were $306 billion in 2001; doubled to $612 billion by 2008 due to the wars in Iraq and Afghanistan; and during the President's term were: $657 billion in 2009, $689 billion in 2010, $700 billion in 2011, and 709 billion in 2012.

Proposed defense levels for 2013 through 2021 were generally agreed to by both political parties in last year's Budget Control Act which placed caps on defense (and non-defense) spending for each year through 2021. The $487 billion in defense cuts often referred to are the 10-year budget savings attributable to those bipartisan spending caps adopted in the 2011 law. (Those budget savings are measured against what defense spending would be if it were adjusted each year for inflation.)

The defense "sequester" refers to additional cuts in defense spending of $55 billion per year (in spending authority) through 2021 that will take effect on January 2, 2013, unless Congress acts to avoid the fiscal cliff (automatic spending cuts and tax increases).

As a percentage of GDP, defense has increased from 3.0% in 2001, to 4.3% in 2008, and currently stands at 4.5%.

October 18, 2012: CEO's from major financial institutions wrote to Congress and the President urging them to "work together to reach a bipartisan agreement to avoid the approaching fiscal cliff," saying the "consequences of inaction ...would be very grave."

October 18, 2012: Washington Post reports that President Obama is prepared to veto legislation that avoids the fiscal cliff unless it allows the Bush tax cuts for high income taxpayers to expire. Also, Ezra Klein blogs that the White House plan is to "push Republicans off the fiscal cliff."

October 9, 2012: In a 15-page letter to his congressional colleagues, Rep. Norm Dicks, Ranking Democrat on the House Appropriations Committee detailed the severe impact of automatic budget cuts on public safety, health care, transportation and defense. He also estimates automatic defense cuts of 11.3% -- 1.9% higher than recent OMB estimates.

October 2, 2012: Nonpartisan Tax Policy Center (TPC) analysis calculates that unless Congress and the Administration avoid the fiscal cliff, "nearly 90 percent of Americans would pay more tax, primarily because the temporary cut in Social Security taxes and many of the 2001/2003 tax cuts would expire. Low-income households would pay more due to expiration of tax credits in the 2009 stimulus. High-income households would be hit hard by higher tax rates on ordinary income, capital gains, and dividends and by the new health reform taxes. And marginal tax rates would rise, potentially affecting economic decisions." Dividing taxpayers into 5 groups, by income, the TPC estimates that:

--Taxpayers in the bottom 20% would see their taxes rise by 3.7%.
--Taxpayers in the 2d "quintile" would see their taxes rise by 4.1%
--Taxpayers in the middle "quintile" would see their taxes rise by 3.8%
--Taxpayers in the 4th "quintile" would see their taxes rise by 4.2%
--Taxpayers in the top 20% would see their taxes rise by 5.8%.

Sept. 28, 2012: OMB tells agencies to "continue normal spending and operations" as the new fiscal year begins on October 1, 2012. The memo from the White House to department heads says "the administration continues to urge Congress to pass a balanced package of deficit reduction that would replace the potential sequestration on January 2, 2013....If necessary (these instructions) will be amended to address that sequestration."

Sept. 24, 2012: Bipartisan Group of Senators warn of the dire consequences of a sequester.

Sept. 20, 2012: Congressional Research Service releases an updated report on the macroeconomic consequences of the fiscal cliff.

Sept. 18, 2012: Senate Budget Chairman Kent Conrad tells CNN he is working with 7 other Senators ("Gang of Eight") to develop a package for the November-December lame duck session that would: (1) delay the fiscal cliff by 6 months; (2) establish a detailed "framework" -- based on the Simpson Bowles plan -- for $4 trillion in deficit reduction over 10 years with congressional committees to fill in the details next year; and (3) make a "downpayment" on deficit reduction to take place immediately. Whether this approach can overcome the ongoing gridlock over tax rates is unclear.

Sept. 14, 2012: White House released a report detailing the automatic "sequester" cuts scheduled to take effect on January 2, 2013. No major surprises because the cuts are required by last summer's debt ceiling law and must be applied across-the-board in sufficient amounts to cut spending authority by $109 billion in FY 2013.

Today's report releases preliminary estimates of percentages that will be cut from all programs, projects and activities: 9.4% for defense discretionary spending and 8.2% for non-defense discretionary spending. (These are reductions to spending authority; the actual outlay reductions will be less for FY 2013, based on how quickly various programs spend their funds.) The law specifies that Medicare cuts are limited to 2%.

The sequester would also cut non-exempt, nondefense "mandatory" programs by 7.6% and non-exempt defense "mandatory" programs by 10%.( "Mandatory" spending generally refers to entitlement or other programs that are not annually appropriated.) However, most entitlement programs are exempt, as explained in this CRS reportExempt programs include military personnel, veterans' programs, Social Security and some low-income programs including Medicaid, food stamps (SNAP), Temporary Assistance for Needy Families (TANF), and Supplemental Security Income (SSI).)

In dollar terms, the cuts are:
$54.6 billion from defense discretionary
$38 billion from nondefense discretionary
$11 billion from Medicare
$5.5 billion from nondefense, nonexempt mandatory spending
$91 million from a student loan fee increase
Total Reduction for FY 2013: $109 billion

The law requires $109 billion of automatic cuts in each year through 2021, although future years allow for more discretion in which programs are cut.

The report does not estimate how many workers would be cut in FY 2013 but a senior administration official told CNN Money "this would have a significant effect on the federal workforce."

Not surprisingly, the report urges action to substitute an alternative set of budget reductions, saying the across-the-board cuts "would be deeply destructive to national security, domestic investments, and core government functions."

More specifically, on the defense side of the budget, the report says "while the Department of Defense would be able to shift funds to ensure war fighting and critical military readiness capabilities were not degraded, sequestration would result in a reduction in readiness of many non-deployed units, delays in investments in new equipment and facilities, cutbacks in equipment repairs, declines in military R&D efforts, and reductions in base services for military families."

On the non-defense side, the report says "sequestration would undermine investments vital to economic growth, threaten the safety and security of the American people, and cause severe harm to programs that benefit the middle-class, seniors, and children," specifically mentioning cuts in education, FBI agents, customs and border protection agents, correctional officers, federal prosecutors, air traffic control, food safety, air and water quality, NIH health research, FEMA response to terrorism and disasters, housing, and food assistance.

The report also pointedly reminds us that the sequester requirement was enacted by "bipartisan majorities in both the House and Senate" -- given all of the recent congressional rhetoric decrying the impending cuts. 
OMB Sequester Report

Sept. 13, 2012: Congress missed last opportunity before the year-end lame duck session to avoid the fiscal cliff. The House passed a six-month stop-gap spending measure 329-91, but neglected to take any actions to avoid the fiscal cliff that threatens the US economy with recession and 2 million job losses.

Sept. 13, 2012: The House passed a symbolic bill (HR 6365that would require the President to submit to Congress by Oct. 15 legislation to replace the automatic across-the-board cuts scheduled for January.with alternative cuts. However, the Senate is not expected to take up the bill, and the White House threatened to veto it.

Sept. 12, 2012: AMA, AHA, and ANA released a new report concluding that the Medicare portion of the impending sequester will result in the loss of 496,000 jobs in 2013 and 766,000 by 2021.

Sept. 11, 2012: Judge Julia Smith Gibbons of the U.S. Circuit Court of Appeals said the automatic sequester would cut the judiciary's budget by more than $500 million and "a reduction of this magnitude would cripple the operations of the federal judiciary and our constitutional mission would be compromised due to these sudden, arbitrary cuts," reports Congressional Quarterly.

Sept. 11, 2012: Moody's says it would maintain a "negative outlook" on the U.S. credit rating if the economy experiences the shock of going over the fiscal cliff.

Sept. 10, 2012: According to Congressional Quarterly, Sen. John McCain is seeking a 3-month delay of automatic defense cuts scheduled for January and may offer an amendment to legislation Congress will consider this week to keep the government operating during the first 6 months of the new fiscal year (which begins October 1).

Continuing political gridlock over whether to extend tax cuts for high income earners is impeding any general progress on avoiding the overall fiscal cliff, which the Congressional Budget Office projects will lead to a 2013 recession and the loss of 2 million. jobs. Whether Congress will avoid the cliff in a post-election lame duck session remains doubtful due to continuing gridlock over tax rates and spending levels. Click here for analysis.

August 22, 2012: The nonpartisan Congressional Budget Office projects that going over the cliff will lead torecessionand CBO Director Elemendorf told reporters this would lead to a loss of two million jobs. 
Link to CBO August Update

In its August budget update, CBO reiterated its projection that failure to avoid the fiscal cliff "will lead to economic conditions in 2013 that will probably be considered a recession," with unemployment rising to 9.1 percent. Alternatively, if the cliff is avoided, CBO projects no recession with GDP growth of 1.7 percent and unemployment at 8 percent.

The CBO said, "The increases in federal taxes and reductions in federal spending, totaling almost $500 billion, that are projected to occur in fiscal year 2013 represent an amount of deficit reduction over the course of a single year that has not occurred (as a share of GDP) since 1969....Real GDP is expected to fall at an annual rate of 2.9 percent in the first half of next year and then to rise at an annual rate of 1.9 percent in the second half."

"The stakes of fiscal policy are very high right now," said CBO Director Doug Elmendorf"The sooner that that uncertainty is resolved, the stronger the economy would be in the second half of this year.... Economic growth right now is being held back by the anticipation of this fiscal tightening."

At the same time, CBO has projected that avoiding the fiscal cliff by permanently extending all expiring tax cuts, repealing the automatic spending cuts, indexing the alternative minimum tax, and repealing the automatic medicare physician payment cuts -- without any way to pay for these policies -- would have disastrous consequences for the nation's debt, adding $7.7 trillion to the publicly held debt by 2022.

This is the essence of our fiscal challenge: avoiding the fiscal cliff, recession and 2 million job losses in 2013, while at the same time putting in place a long-term set of spending and tax reforms that will stabilize the debt.

August 18, 2012: The Scariest Fiscal Cliff Chart

August 16, 2012: CNBC: Cliff Hanger: Corporate America Puts Everything on Hold

August 10, 2012: Nonpartisan Congressional Research Service Releases Analysis of Fiscal Cliff

August 9, 2012Congressional Research Service releases a report on programs exempt from automatic cuts

August 7, 2012: President signs into law a bill (HR 5872) requiring the Administration to detail within 30 days how it would implement the January 2013 automatic across-the-board cuts in defense and non-defense spending. 

This will include the projected across-the-board percentage reductions (about 8% for nondefense and 11% for defense) as well as cuts in each specific program, project and activity, except for programs that are exempt from the automatic cuts, which include military personnel, veterans' programs, Social Security and some low-income programs including Medicaid, food stamps (SNAP Temporary Assistance for Needy Families (TANF), and Supplemental Security Income (SSI). 

The sequester details provided by OMB in early September will underscore the impact of going over the cliff, but are unlikely to break the partisan gridlock over extending the Bush tax cuts for upper income taxpayers, which is the core political conflict leading the nation towards the fiscal cliff.