Latest News on FY '13 Sequester, FY '14 Budget, Debt Ceiling

Click on FY'13-'14 button, above, for latest news on the President's Budget, Congressional Budget Resolution and Appropriations

Top Sequester Facts:

1. $85 billion in budget authority (aka "appropriations") were canceled on March 1, 2013 (click here for the sequester report). However, as noted by the Congressional Budget Office, this will result in a lesser amount of outlay reductions for FY 2013 ($42 billion) -- with the remainder occurring after the current fiscal year.
   
   
2. Impact of sequester: CBO estimates that the sequester will cut GDP growth by 0.6 percentage and job growth by 750,000 full-time jobs during this calendar year.
   
   
3. Of the $85 billion, half is from defense discretionary spending and half from non-defense spending. Of the non-defense cuts, about $29 billion is from nondefense discretionary programs, $10 billion is from Medicare, and $4 billion is from other mandatory spending. (Source: Table 1.2, CBO annual report.)
   
   
4. Some of the government's largest programs are exempt from the cuts including Social Security, Medicaid, veterans programs and some low income programs including food stamps (SNAP). Medicare, though not fully exempt, is limited to a 2 percent cut in payments to providers. The President also exercised statutory authority to exempt military personnel.
   
   
5. In order to cut $85 billion from the remaining non-exempt programs during the remaining 7 months of the current fiscal year, will require across-the-board cuts of 13% for defense programs and 9% for non-defense programs.
   
   
6. There is very little flexibility on how the cuts are administered because the law requires that a uniform percentage reduction be be applied across-the-board to all "programs, projects and activities."
   
   
7. However, there is flexibility on when the cuts are applied, although as a result of the sequester budget officers have less money to operate their programs through the end of the fiscal year. Consequently, the longer they wait to furlough employees and reduce operations and services, the deeper the cuts will need to be to fulfill their agency missions through September 30 (the end of the fiscal year).
   
   
8. If the sequester law is left unchanged, it will cut $1 trillion -- primarily from defense and nondefense discretionary programs -- over the next decade. This is in addition to the $1 trillion already cut from discretionary spending by the Budget Control Act of 2011 by imposing spending caps through FY 2021.
   
   
9. Impacts of the sequester on government operations and services: Agency summaries. Washington Post summary of agency-by-agency impact
   
   

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

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.

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:

• Makes permanent the Bush tax rates for income up to 400k for individuals and 450k for joint filers
  
  
• Above that threshold the tax rate increases from 35% to 39.6%
  
  
• Above that threshold tax rates for capital gains and dividends increase from 15% to 20%
  
  
• Reinstates limits on the personal exemption and itemized deductions on income above 250k/300k
  
  
• Extends the current estate tax exemption amount, but raises the rate to 40%
  
  
• "Tax extender" provisions extended through 2013
  
  
• Alternative Minimum Tax (AMT) permanently fixed (i.e. indexed to inflation)
  
  
• Avoids the "SGR" automatic cuts (27%) in Medicare physician pay for another year
  
  
• Extends through 2013 long-term unemployment benefits
  
  
• Extends through FY 2013 most federal farm programs and policies, including dairy prices, in order to prevent a spike in milk prices
  
  
• Delays automatic spending cuts to March 1, 2013 and reduces the required $109 billion acorss-the board cuts in defense and nondefense spending ("sequestration") from $109 billion to $85 billion. (It also delays until March 27 a separate $11 billion sequester of defense spending scheduled to occur because current defense spending exceeds the statutory cap set in 2011.)
  
  
• Does this stabilize the nation's economy? No, it does not. It partially avoids an immediate fiscal crisis that could have pushed the nation into recession during the first half of 2013, and even there, immediate risks to the economic recovery remain with automatic cuts scheduled for March, a potential debt ceiling crisis, and the payroll tax cut having expired.
  
  
• For the long-term, the U.S. debt remains unsustainable. To be sure, significant progress was made in 2011 by placing caps on defense and nondefense discretionary spending, saving about $1 trillion over 10 years. In addition, the January 1st fiscal cliff deal will raise about $600 billion over 10 years in new revenues by allowing rates to rise on incomes above 400k/450k. However, the largest portion of the budget -- entitlement spending -- remains unaddressed.
  
  The rapid growth of Medicare and Medicaid due to fast-rising healthcare costs and the aging of the population remains largely unaddressed.
  
  In addition, annual cash deficits of the Social Security program will rapidly increase due to the aging of the population and the program's solvency is therefore at risk.
  
  And reforms to other "mandatory spending" such as farm programs and federal retirement programs remain addressed.
  
  All of these areas -- Medicare, Medicaid, Social Security, other mandatory spending, as well as tax expenditures -- need to be addressed in order to stabilize the long-term debt and ensure long-term economic stability and growth. Proposals to reform each of these areas are laid out in the two major deficit reduction plans: Simpson-Bowles and Domenici-Rivlin.
  
  

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 four 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 billion 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 2013...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 report. Exempt 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 6365) that 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 to recession, and CBO Director Elmendorf 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, 2012: Congressional 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.

August 7, 2012: Op-ed: If Congress goes over the Fiscal Cliff, why the tax increases and spending cuts will be difficult to un-wind

August 6, 2012: Secretary of Defense Panetta, calls the automatic cuts "crazy, insane, nutty" and blamed the looming cuts on both Democrats and Republicans.

August 2, 2012: Senate Parliamentarian confirms that there is no fast-track procedure available to replace a presidential sequester order.

August 2, 2012: Congressional Quarterly reports that "senior congressional aides" have estimated that the across-the-board cuts at the Defense Dept. would be about 11.2 percent in 2013, given the President's decision to exempt military personnel (about 30 percent of the defense budget)..

August 2, 2012: Senate Finance Committee approves a two-year AMT (Alternative Minimum Tax) patch and tax extenders package (R&E tax credit, deduction for state sales taxes and other expiring provisions.). However, the measure fails to address the fiscal cliff (major tax hikes in early January 2013 when the Bush tax cuts expire). The package costs $205 billion over 10 years, the bulk of which is from the AMT patch. Outlook: Senate could vote on the package in September, but the House has not scheduled action on extenders and, as reported by Congressional Quarterly, may wait until consideration of the larger tax issues after the election.
Documents related to the tax extenders bill JCT Revenue Estimates
CRS Summary of Tax Provisions Expiring in 2012 including the expiring "Bush tax cuts"

August 1, 2012: House passes a one-year extension of Bush tax cuts after rejecting a Democratic proposal to let the cuts expire for individuals earning up to $200k and joint filers earning up to $250k. (The Senate rejected the House approach the previous week.) Summary of the House-passed bill

July 31, 2012: OMB (White House budget office) issued a letter on the automatic defense and non-defense budget cuts (“sequestration”) scheduled to occur on January 2, 2013.   In summary, OMB:  (1) acknowledges that the sequestration “would be highly destructive to national security and domestic priorities”;  (2) calls on Congress to avoid sequestration by adopting alternative deficit reduction measures that are “balanced”; and (3) states their intention to begin consulting with agencies on preparations for sequestration. 

In a separate letter to Congress, OMB stated the President's intent to exempt military personnel from sequester, which will increase the spending cuts applied to non-personnel defense accounts.

July 31, 2012: Congressional leadership announces stopgap measure ("continuing resolution") to prevent government shutdown on October 1, 2012, but measure fails to address the impending fiscal cliff

July 31, 2012: CNBC Fed Survey of top money managers, investment strategists, and economists identifies the fiscal cliff as the biggest threat facing the U.S. economy, taking the spot away from the European financial crisis. 78 percent of respondents said the fiscal cliff is already having a negative effect on business.

July 30, 2012: Bipartisan op-ed on how to avoid the fiscal cliff

July 30, 2012: Dept. of Labor released letter issuing guidance that the WARN Act does not require Federal contractors "whose contracts may be terminated or reduced in the event of sequestration on January 2, 2013" to provide WARN Act notices 60 days before that date to workers employed under government contracts due to "the lack of certainty about how the budget cuts will be implemented and the possibility that the sequester will be avoided before January."

July 25, 2012: Sen. Tom Harkin releases report on automatic cuts' impact on nondefense jobs and services

July 25, 2012: Senate passes legislation to extend for one year the Bush tax cuts on income up to $200k for individuals and $250k for joint filers, after defeating a Republican alternative to extend the cuts for all income levels. (The House later rejected the Senate approach on August 1.) Statement of Administration Policy on Senate bill

July 17, 2012: Federal Reserve Chairman Ben Bernanke, at a Senate Banking Committee hearing, urged Congress to pull back from the fiscal cliff.

July 17, 2012: A George Mason University study commissioned by the Aerospace Industries Association projects the automatic budget cuts could result in the loss of more than 2 million jobs in 2013 alone

July 3, 2012: IMF warns that failure to avoid the fiscal cliff "would trigger a severe fiscal tightening in 2013" threatening a recession "early next year" and "significant negative repercussions on an already fragile world economy." IMF Report

May 22, 2012: CBO predicts that Fiscal Cliff will cause a recession in the first half of 2013. CBO estimates that the combination of tax increases and spending cuts -- together characterized as the "fiscal cliff" -- would remove about $600 billion from the economy between 2012 and 2013.

May 10, 2012: House passed legislation (HR 5652) to cancel the 2013 sequester and replace it with spending cuts to be achieved elsewhere, while leaving the 2014-2021 automatic cuts in place. Link to bill summary

November 21, 2011: Congressional "Super Committee" announces inability to reach a budget deal, triggering automatic budget cuts ("sequestration") on January 2, 2013

What is the Fiscal Cliff: 

The fiscal cliff is a “perfect storm” of tax and spending deadlines at the end of 2012.  The most significant are expiration of the Bush tax cuts and automatic budget cuts.

The Bush tax cuts expire at the end of 2012.  Republicans want to extend all of the tax cuts. The President and congressional Democrats want to let the cuts for upper income earners (those earning over $250,000) expire.  Without a negotiated compromise, all cuts will expire impacting the middle class and seriously dampening consumer spending.

(Expiration of the "Bush tax cuts" would: increase tax rates from 10 / 15 / 25 / 28 / 33 / 35 to 15 / 28 / 31 / 36 / 39.6; increase the long-term capital gains rate from 15% to 20%; tax dividends at ordinary rates instead of 15%; reinstate the limitations on itemized deductions and personal exemptions for high-income filers; roll back the expansion of the EITC, child tax credit, adoption tax credit and dependent care tax credit; end marriage penalty relief; and reinstate pre-2001 estate tax levels with a $1 million exemption and 55% top tax rate.)

On the spending side of the budget, we face deep across-the-board cuts (known as a “sequester”) of about 9.4 percent in defense discretionary programs and about 8.2 percent in non-defense discretionary programs in January 2013, and two percent cuts in Medicare, if Congress takes no action. These automatic cuts are mandated by the Budget Control Act that grew out of last summer’s debt ceiling negotiations. The cuts were triggered by the failure of last year’s Congressional “Super Committee” to develop a long-term debt reduction plan for the nation.  These severe austerity measures will further weaken our economic recovery.

The fiscal mayhem that faces us at year’s end also includes: expiration of dozens of tax incentives including the R&D credit; expiration of the “AMT patch” (that will impact 31 million middle income taxpayers filing their 2012 taxes); expiration of the “doc fix” (that prevents a nearly one-third cut in Medicare physician payments); expiration of the payroll tax cut; and hitting the federal debt ceiling in early 2013 which could threaten U.S. solvency and global economic panic.

Fiscal cliff breakdown, by dollar impact:

• Expiration of the 2001 and 2003 tax cuts and failure to extend AMT relief: $225b tax increase (see details of the January 1, 2013 tax increases below)
• Expiration of the payroll tax cut: $85b
• Expiration of other tax provisions such as partially expensing investment property: $65b
• Affordable Care Act tax increases: $18b
• Automatic spending cuts: $54b in reduced outlays resulting from appropriations cuts of $109b
• Automatic 27% cut in Medicare physician payments (aka "SGR"): $10b
  (source: CBO)
  

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Where the Fiscal Cliff Began: 

The August 2011 Debt Ceiling Agreement included more than $750 billion in spending cuts (compared with what spending would have been if appropriations were allowed to grow with inflation) by placing statutory caps on discretionary spending for 10 years. Including interest savings, this totals up to deficit reduction of more than $900 billion.  In addition, the Debt Ceiling Agreement established a “Super Committee” to achieve another $1.2 trillion in deficit reduction.  

The total deficit reduction of about $2.1 trillion over 10 years —even though an enormous reduction in discretionary spending—is not sufficient to stabilize the projected explosion of U.S. debt. The Domenici-Rivlin Bipartisan Debt Reduction Task Force estimated that fully stabilizing the debt for the long-term would require nearly $6 trillion in deficit reduction over 10 years.

Background:  In August, the Treasury was close to hitting the statutory ceiling on the (gross) U.S. debt (about $15 trillion), threatening a possible default.  Deficit hawks used the threat of default to force enactment of the Budget Control Act of 2011 which had two key provisions:

1. The BCA imposed tight caps for the next 10 years on total discretionary spending. The programmatic impact of these reductions will be determined each year in the appropriations process.  (“Discretionary spending” refers to programs that are annually appropriated, as opposed to “entitlements” like Social Security and Medicare – the costs of which are driven by benefit formulas written into the law.) 

The BCA’s 10-year spending caps are very tight and will significantly impact many programs – both defense and non-defense.  Under the spending caps, total discretionary spending remains well below FY 2011 levels for the next decade (see the table below).

Although, recent political rhetoric might suggest that the caps are not significant, the challenges for policymakers are daunting because: (1) the costs of a growing and aging population must be absorbed within declining spending caps; (2) vital transportation infrastructure repairs and expansions must be absorbed within the caps; (3) the rapidly growing costs of veterans health care must be accommodated; and (4) the costs of inflation must be fully absorbed. (Adjustments are permitted for emergencies and military operations.)

To put this in perspective, under the spending caps total discretionary spending declines as a percent of Gross Domestic Product (GDP) from 9% in FY 2011 to 6.1% in FY 2021.  Since FY 1962—the first year for which data is available—discretionary spending has only been that low as a percent of the economy in one other year.

The spending caps are enforced through automatic across-the-board cuts that are implemented by the Office of Management and Budget if the cap for any year is exceeded. 

2. The Debt Ceiling Agreement also established a Joint Select Committee on Deficit Reduction – the so-called “Super Committee” of 6 Democrats and 6 Republicans – which was required to report to the full Congress by Thanksgiving a plan to further reduce projected deficits by $1.2 trillion over 10 years.  Republicans hoped the Super Committee would tackle entitlement reform and Democrats hoped the Super Committee would tackle tax reform (but as explained below, the Super Committee failed).

On November 21, 2011 the Super Committee announced failure to reach agreement, setting up automatic spending cuts in January 2013.

Under the terms of the Budget Control Act, failure of the Super Committee to come up with $1.2 trillion in budget savings will trigger in January of 2013 automatic across-the-board cuts that will drive discretionary spending even lower than the already established caps. Automatic cuts will also be made in some mandatory (entitlement) programs, primarily Medicare.

Here’s how the automatic cuts will work (in plain English):

- The automatic cuts are designed to save $1.2 trillion by FY 2021, since the Joint Committee failed to do so.  Excluding interest savings, this requires about $1 trillion in program cuts.

These are cuts in Congress' appropriations of spending authority to agencies, rather than cuts to annual outlays -- which is most significant in 2013, when the outlay reductions will appear considerably lower than the cuts in spending authority (due to the time lag between budget cuts and reduced outlays).

- The cuts are to be divided evenly between defense and non-defense programs – about a half trillion from defense and a half trillion from non-defense over the 9 years.

- The cuts are to be spread evenly over the 9 years (2013-2021), requiring about $55 billion in cuts from defense and $55 billion in cuts from non-defense in each of the nine years.

- In FY 2013, the required budget cuts of $55 billion in defense and $55 billion in nondefense, are to be carried out through across-the-board cuts.  This will require 9.4% cuts in all defense accounts (although the President has exercised his authority to exempt military personnel), and 8.4% in all non-defense accounts (except for those programs that are exempted by law).  These are cuts in addition to those already required to comply with the spending caps enacted by the Budget Control Act.

- Most of the cuts will come from discretionary spending programs (i.e., programs that are annually appropriated) because most of the entitlement programs – such as Social Security, Medicaid, Veterans Compensation and Food Stamps -- are exempted by law. 

- Medicare, however, is only partially exempted and is subject to a 2 percent cut in most areas of the program in each of the years, amounting to $123 billion in benefit cuts over 9 years.

- In each of the years after FY 2013, the cuts are not required to be across-the-board as long as they produce the required $55 billion in defense and $55 billion in non-defense savings.  If Congress fails to produce the required amount of savings, the Office of Management and Budget is required to make up the difference through across-the-board cuts.

- The automatic spending reductions required in each of the 9 years are estimated by CBO as shown in the table below. The cuts are measured against the spending caps imposed by the Budget Control Act of 2011 in the case of discretionary spending, and against projected spending in the case of mandatory programs.

Amt. of Reductions (billions)
	2013	2014	2015	2016	2017	2018	2019	2020	2021
Defense	$55	$55	$55	$55	$55	$55	$55	$55	$55
Non-Defense:
-Discretionary	$39	$39	$38	$36	$36	$36	$35	$33	$32
-Medicare	$11	$11	$12	$13	$13	$14	$15	$16	$18
-Other*	$5	$5	$5	$5	$5	$5	$5	$6	$5
Estimated Percentage Reductions to Implement the Automatic Cuts
Defense	11%								8.5%
Non-Defense:
-Discretionary	8.0%								5.4%
-Medicare	Reductions capped at 2% in each year
*Refers to non-exempt mandatory (mostly entitlement) programs      Source: CBO, Updated August 2012

Summary, Automatic Cuts:
Total Defense Reductions, 2013-2021: $492 billion
Total Non-defense Reductions, 2013-2021: $492 billion, of which $123 billion is from Medicare.

The following table shows the resulting dollar levels for discretionary spending following implementation of the automatic cuts:

Limits on Discretionary Budget Authority for Fiscal Years 2013 to 2021 (billions of dollars)
	2013	2014	2015	2016	2017	2018	2019	2020	2021
Caps Set in the Budget Control Act
Defense**	546	556	566	577	590	603	616	630	644
Non-Defense	501	510	520	530	541	553	566	578	590
TOTAL	1,047	1,066	1,086	1,107	1,131	1,156	1,182	1,208	1,234
Effect of Automatic Cuts
Defense	-55	-55	-55	-55	-55	-55	-55	-55	-55
Non-Defense*	-39	-38	-38	-37	-36	-36	-34	-33	-32
Revised Caps
Defense**	***	501	511	522	535	548	561	575	589
Non-Defense	***	472	482	493	505	517	532	545	558
TOTAL	***	973	993	1,015	1,040	1,065	1,093	1,120	1,147
*Medicare and other mandatory cuts increase the non-defense cuts to $55 billion per year **Defense caps exclude war spending of $118b in 2013, increasing to $138 billion in 2021 **The 2013 reductions are implemented through across-the-board cuts, but the caps are not technically reduced. Source: CBO, Updated August 2012

 

The idea behind the automatic cuts is that they would serve as a “Sword of Damocles” to force agreement by the Super Committee and, in the event of failure, would guarantee an additional $1.2 trillion of deficit reduction – and possibly cause Congress to act in 2012 on legislation to replace the across-the-board cuts with a more sensible approach.

However, the automatic cuts won’t solve the debt crisis and have some serious flaws...The cuts fail to address the largest drivers of projected debt – entitlement growth driven by the aging of the population and health care costs growing faster than the economy – and a deficient tax system that loses too much in special deductions and credits and places the U.S. at a competitive disadvantage.  In addition, some argue that the automatic cuts are economically risky, because they’ll reduce government investment in highways & bridges, schools, public transit, airport modernization, and health research when the economy is weak and needs public investment. 

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