Sequestration. It’s a process in Washington where thoughtful decisions on spending and taxation priorities are being replaced with last minute politicking, grandstanding, and eventual 11th hour deal-making. The latest showdown revolves around the March 1st deadline agreed to by Congress and the President in the budget deal negotiated in December (Public Law 112-240). That is when about $85 billion is expected to be cut equally from federal discretionary defense and domestic spending accounts. Or not. Like a reluctant swimmer, federal decision-makers keep stepping to water’s edge, dipping their toes in, and then retreating.
Here’s the latest. As we noted in January, the Obama Administration and Republican congressional leaders, led by Vice President Biden and Senate Minority Leader McConnell (R-KY), agreed to a package of tax increases that raised individual and capital gains tax rates, among others. This also delayed the onset of $1.2 trillion in defense and domestic spending cuts mandated by Congress over the next 10 years under the Budget Control Act (Public Law 112-35). The new deadline for these cuts to begin is March 1st. It also reduced the amount needed to be cut for Fiscal Year 2013 from $110 to $85 billion. The question is: What will Congress and the President do now?
Déjà-vu all over again. The tortured process of threatened sequestration is being re-lived, bringing to mind Yogi Berra’s famous saying, “It’s like déjà-vu, all over again!” Congress and the President are so stalemated over the direction for the U.S.’s spending needs that it seems the only way to force decisive budget action is with a deadline in place. The debt limit has been temporarily taken off the table, with Congress and the President agreeing to legislation that suspends the $16.4 trillion debt ceiling through May 19th (Public Law 113-3). A federal budget for Fiscal Year 2013 has not yet been enacted, with the federal government’s operations instead being funded through – March 27th – by a resolution continuing spending at Fiscal Year 2012 levels (“CR”). Sequester, in other words, is the only negotiating tool each side has. But the results to the country of constantly going through this process are likely damaging. For the fourth quarter of 2012, when the U.S. went through the last spending showdown, Gross Domestic Product declined 0.1 percent, the first decline since the middle of 2009. Reductions in spending decisions, especially those related to defense spending, are blamed for most of the decline. Some contractors are already saying that they are avoiding government contracts, given funding (and policy) uncertainties.
Identifying opportunities in a challenging environment, both before Congress and the Executive Branch. With the impending deadline, Congress has responded by…leaving town. Senators and Representatives are back in their congressional districts and won’t return until next week. This leaves one week to avert cuts all agree will hurt the already slow economic recovery. News accounts indicate Senate Democrats are working towards an alternative package of $110 billion in spending and tax cuts, while Republicans are considering their own plan, which includes about $85 billion in spending cuts and furloughs for federal employees. Votes are possible next week, but with so little time remaining before March 1st, it is possible that a deal to avert the cuts will not be reached in time. If that happens, expect to see attention shift to either re-programming some of these cuts or undoing them altogether. We would note that in addition to the sequestration cuts mandated under the Budget Control Act, the Act also cuts non-defense and defenses discretionary spending by about 10 percent over the next 10 years, through the use of spending “caps” that limit how much money may be appropriated annually. We expect that when the impact of all these reductions is fully felt, through (1) programmatic cuts or (2) furloughs of federal employees or (3) both, Congress will act to either re-program many cuts or undo them altogether. This presents an opportunity to work with Congress and the Executive Branch to protect programs and projects. It also guarantees that the activity leading up to March 1st will not be the last word on how the government spends the federal tax dollar.