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Sequestration

What Are the Spending Cuts for 2013, 2014 and Beyond?

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US Capitol Building, Washington DC, USA
Hisham Ibrahim/Photodisc/Getty Images
soldier

Sequestration cut defense spending.

Chris Hondros / Getty Images

What Is Sequestration?

Sequestration means something that is locked away for safekeeping. It comes from the Latin word "sequestrare." When ancient Romans couldn't agree who owned a piece of property, they gave it to a third party, called the sequester, to hold onto it until they resolved their differences.  (Source: CNN, 'Sequestration': A way-too-big word for a simple thing, February 19, 2013)

This makes it a perfect word for the current sequester, which was created by the 2011 Budget Control Act. Congress couldn't agree on the best way to lower the deficit, so it used the sequester until the dispute could be settled. Since it seems to be growing worse, the sequester has essentially replaced the normal budget process.

The sequester cuts Federal spending by $1.2 trillion over 10 years. It does this in two ways. First, it cuts $109.6 billion from each fiscal year's budget. It cuts an equal amount from both Mandatory and Discretionary. Mandatory programs are those established by Acts of Congress, like Medicare, Social Security and the Affordable Care Act. Funds must be appropriated to meet the expenses of these programs. It takes another Act of Congress to change them. The Discretionary budget is mostly Defense, and includes every other Federal government agency. Congress appropriates these funds each year 

Second, sequestration sets caps on spending.  If the caps are exceeded, then the U.S. Treasury must withhold any funds above the cap limit. These caps are a fail-safe system. (For more on the caps, see AP News, Automatic cuts emerge as budget battles issue, October 14, 2013)

The FY 2013 Sequester

The spending cap for FY 2013 was $988 trillion, $55 billion lower than the FY 2012 cap of $1.043 trillion. However, Congress enacted $85 billion in spending reductions, keeping spending below the cap. Sequestration cut these four main areas:

  1. Military spending - $42.7 billion, or 7.5%.
  2. Medicare - $11.1 billion from a 2% cut in payments to providers. In other words, they get reimbursed 98% of their submitted bills. 
  3. Other Mandatory programs - $5.4 billion, or 8%.
  4. Other non-defense Discretionary programs - $26.1 billion, or 5.1% cut. (Source: Washington Post, Wonkblog,The Sequester: Absolutely everything you could possibly need to know, in one FAQ, February 20, 2013)

These cuts kicked in on March 1, 2013. Sequestration was originally supposed to occur January 1. However, Congress moved the date to March as part of its deal to avoid the fiscal cliff. This series of  tax increases would have subtracted $607 billion from Gross Domestic Product (GDP). For more, see Fiscal Cliff 2013.

The FY 2014 Sequester

The spending cap for FY 2014 is $967 billion. House Republicans want to maintain the cap, but shift all cuts from military to other domestic programs. Democrats want to raise the cap to $1.06 trillion, end the sequester and return to the normal budget process.

Congress enacted $109.3 billion in cuts. Here's the breakout:

  1. Military spending - $54.6 billion, or 9.9%.
  2. Medicare - $11.6 billion, or 2%. 
  3. Other Mandatory programs - $6 billion, or 7.3%.
  4. Other non-defense Discretionary programs - $37 billion, or 7.3 billion%. (Source: Center on Budget and Policy Priorities, Sequestration By the Numbers

This second round of sequestration cuts are scheduled to start on January 15, 2014. Until then, the FY 2013 spending levels remain in place. This gives the Conference Committee time to agree on a budget to avoid this next round of sequestration. 

FY 2015 and Beyond

Sequestration's goal is to reduce spending by $1.5 trillion in the next decade. Therefore, it mandates that an additional $109.5 billion be cut each year through FY 2021.

What Caused Sequestration?

Why would Congress do such a potentially destructive thing, when Congress itself sets the Federal budget? Why didn't it just create a budget that stayed below the debt ceiling? Basically, the budget planning process has not been used, because tea party Republicans want to reduce spending on Mandatory programs like Medicare, Social Security and Obamacare. These programs need an Act of Congress to change spending, and Republicans know they can't get the Senate to agree without using these extraordinary measures.

Here's what happened. In August 2011, Democrats and Republicans could not agree on the best way to reduce the budget deficit. Democrats refused to extend the Bush tax cuts for families making $250,000 or more, saying that the wealthy could best afford the higher tax rates needed to bring in more revenue. They also leaned toward cuts in defense, and away from mandatory programs like Social Security, Medicaid and Medicare. Republicans, on the other hand, argued that high-end tax increases would slow job creation among small businesses, and that the mandatory entitlement programs fostered a nation of dependency.

The stalemate became a crisis in 2011, as existing spending and tax cuts sent the nation's debt toward the predetermined ceiling limit.  cannot push the debt above the national debt ceiling.

To avoid a debt default, party leaders finally agreed to appoint a bipartisan Supercommittee to come up with a solution, and then raised the debt ceiling by $2.3 trillion.

However, the Supercommittee failed to come up with a plan by the November 23 2011 deadline, even ignoring the reasonable recommendations of the Simpson-Bowles Report. This failure triggered the sequestration cuts, due to kick in on January 1, 2013.

It wasn't until after the 2012 Presidential election that the lame duck Congress could refocus on the budget, in a last-minute attempt to avoid sequestration and the rest of the fiscal cliff. The cliff was avoided, but sequestration was not. For more, see And Now...Avoiding the Fiscal Cliff. (Source: Suzy Khimm, Wonkblog, The Sequester Explained, September 14, 2012; CP Politics, What Is Sequestration, October 25, 2012 )

How It Affects You

In the short term, sequestration probably slowed economic growth, although not as much as initially feared. That's because government spending is an important component of GDP. Businesses that rely on government contracts lost some business. This includes aid to states, highway construction and the FBI. Unemployment didn't fall as far as it would have, since Federal agencies couldn't hire many new workers. Reduction in payments to doctors meant that some dropped Medicare, resulting in fewer choices for patients. Article updated October 18, 2013

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