nlc sequester brief 3 12 13.pptx [read-only] · • phil gramm: “it was never the objective of...

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3/12/2013 1 Shai Akabas Senior Policy Analyst – Bipartisan Policy Center THE SEQUESTER: MECHANICS AND IMPACT KEY TAKEAWAYS 2 1) The sequester will slow the recovery and cut investment & security, while doing very little for broader budget issues 2) The sequester will NOT be catastrophic, but the effects will be both widespread and acute 3) Even with the sequester having been triggered, the budget debate for 2013 is far from over WHAT IS A SEQUESTER? 3 Automatic reduction to federal government spending for a given fiscal year Gramm-Rudman-Hollings – Balanced Budget and Emergency Deficit Control Act of 1985 Phil Gramm: “It was never the objective of [GRH] to trigger the sequester; the objective of [GRH] was to have the threat of the sequester force compromise and action.” ‘80s and ‘90s sequesters were rarely carried out, but pushed Congress to achieve fiscal goals in ‘90s EXEMPTIONS 4 Most mandatory spending and some non-defense discretionary (NDD) programs are exempt from the sequester Since the absolute dollar cuts required - $42.5 billion to each of defense and domestic – are explicit in the law, these exemptions mean heavier cuts elsewhere NDD Exemptions Pell grants Department of Veterans’ Affairs programs Transportation programs paid for by the Highway Trust Fund Cuts to Indian health and migrant health centers are capped at 2% Mandatory Exemptions Social Security Medicaid Food stamps (SNAP) Medicare annual cuts are limited to 2% and are made to provider payments and plans FY 2013 SEQUESTER BREAKDOWN (CUTS IN BILLIONS) 5 Medicare $11.3 Other Mandatory $5.5 NonDefense Discretionary $25.8 Defense Discretionary* $42.7 Sources: Office of Management and Budget, and Bipartisan Policy Center Calculations * Roughly $50 million of the cut attributed to defense discretionary is actually taken from defense mandatory programs. Total FY 2013 Cut = $85.3 Billion Note: Numbers may not add due to rounding. MOST FY 2013 SEQUESTER CUTS FALL ON THE SMALLEST PIECES OF THE BUDGET 6 Mandatory $2,120B Tax Expenditures $1,340B Defense Discretionary* $700B Domestic Discretionary* $600B $43B – 50% of Sequester $26B – 31% of Sequester $17B NonDefense – 50% Defense – 50% Sources: BPC Calculations, Congressional Budget Office, Donald Marron and Tax Policy Center using data from the Office of Management and Budget and Treasury *These amounts include all discretionary budgetary resources for the duration of FY 2013, not solely the nonexempt monies that are subject to sequester. Defense discretionary funds include unobligated balances from prior years, which are subject to sequester. Roughly $50 million of the defense cuts actually come from mandatory programs, not discretionary funds. Note: Numbers may not add due to rounding. Cuts Cuts Cuts

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Page 1: NLC sequester brief 3 12 13.pptx [Read-Only] · • Phil Gramm: “It was never the objective of [GRH] to trigger the sequester; the objective of [GRH] was to have the threat of the

3/12/2013

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Shai AkabasSenior Policy Analyst – Bipartisan Policy Center

THE SEQUESTER: MECHANICS AND IMPACT

KEY TAKEAWAYS 2

1) The sequester will slow the recovery and cut investment & security, while doing very little for broader budget issues

2) The sequester will NOT be catastrophic, but the effects will be both widespread and acute

3) Even with the sequester having been triggered, the budget debate for 2013 is far from over

WHAT IS A SEQUESTER? 3

• Automatic reduction to federal government spending for a given fiscal year

• Gramm-Rudman-Hollings – Balanced Budget and Emergency Deficit Control Act of 1985

• Phil Gramm: “It was never the objective of [GRH] to trigger the sequester; the objective of [GRH] was to have the threat of the sequester force compromise and action.”

• ‘80s and ‘90s sequesters were rarely carried out, but pushed Congress to achieve fiscal goals in ‘90s

EXEMPTIONS 4

• Most mandatory spending and some non-defense discretionary (NDD) programs are exempt from the sequester

• Since the absolute dollar cuts required - $42.5 billion to each of defense and domestic – are explicit in the law, these exemptions mean heavier cuts elsewhere

NDD Exemptions• Pell grants• Department of Veterans’ Affairs

programs• Transportation programs paid for by

the Highway Trust Fund• Cuts to Indian health and migrant

health centers are capped at 2%

Mandatory Exemptions

• Social Security

• Medicaid

• Food stamps (SNAP)

• Medicare annual cuts are limited to 2% and are made to provider payments and plans

FY 2013 SEQUESTER BREAKDOWN (CUTS IN BILLIONS) 5

Medicare$11.3 

Other Mandatory$5.5

Non‐Defense Discretionary

$25.8 

Defense Discretionary*

$42.7 

Sources:  Office of Management and Budget, and Bipartisan Policy Center Calculations

* Roughly $50 million of the cut attributed to defense discretionary is actually taken from defense mandatory programs.

Total FY 2013 Cut = $85.3 Billion

Note: Numbers may not add due to rounding.

MOST FY 2013 SEQUESTER CUTS FALL ON THE SMALLEST PIECES OF THE BUDGET 6

Mandatory$2,120B

Tax Expenditures$1,340B

Defense Discretionary*

$700B

Domestic Discretionary* 

$600B

$43B – 50% of Sequester$26B – 31% of Sequester$17B

Non‐Defense – 50% Defense – 50%

Sources:  BPC Calculations, Congressional Budget Office, Donald Marron and Tax Policy Center using data from the Office of Management and Budget and Treasury

*These amounts include all discretionary budgetary resources for the duration of FY 2013, not solely the non‐exempt monies that are subject to sequester. Defense discretionary funds include unobligated balances from prior years, which are subject to sequester. Roughly $50 million of the defense cuts actually come from mandatory programs, not discretionary funds.

Note: Numbers may not add due to rounding.

Cuts Cuts Cuts

Page 2: NLC sequester brief 3 12 13.pptx [Read-Only] · • Phil Gramm: “It was never the objective of [GRH] to trigger the sequester; the objective of [GRH] was to have the threat of the

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DISCRETIONARY SPENDING HAS ALREADY BEEN RESTRAINED 7

BCA Caps Achieved Similar Level of Cuts to Domenici-Rivlin

$1,000

$1,050

$1,100

$1,150

$1,200

$1,250

$1,300

$1,350

$1,400

2012 2013 2014 2015 2016 2017 2018 2019 2020

Discretionary Budget Authority ($B)

Fiscal Years

2010 CBO Baseline

Budget Control ActCaps

Domenici‐Rivlin

Sequestration

Source: Congressional Budget Office, BPC estimates

Note: Total discretionary budget authority (depicted above) includes funding for overseas combat operations,  which has declined since 2011 and is scheduled to decline further over the coming years. 

DEFENSE SPENDING WOULD BE CUT AGAIN FROM UNPRECEDENTED LOW

% of GDP

Source: Congressional Budget Office Budget and Economic Outlook (January 2012)

Fiscal years

Defense Discretionary Spending

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

HistoricalAverage (1972‐2011)

Lowest Levelsince WWII(1999)

CBO BaselineDefense (Jan2011)

Original BCACaps

BCA + FullSequester

8

DOMESTIC DISCRETIONARY SPENDING WOULD BE CUT TO THE BONE

Source: Congressional Budget Office Budget and Economic Outlook (January 2012)

% of GDP

Fiscal years

Non‐Defense Discretionary Spending

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

HistoricalAverage (1972‐2011)

Lowest Levelsince 1970

CBO BaselineNon‐Defense(Jan 2011)

Original BCACaps

BCA + FullSequester

FY 2013 SEQUESTER CUTS WILL DAMAGE ECONOMIC GROWTH 10

Note: Historic recovery growth was calculated by averaging growth from the four years following each recession since WWII (up to 2001), excluding years in which the country quickly experienced another recession. This selection of years is meant to represent what a modest to strong recovery has looked like in the past.

Source: BPC calculations based on St. Louis Federal Reserve data (FRED II) and Congressional Budget Office projections and economic multipliers

0%

1%

2%

3%

4%

5%

Average GDP Growth in Recoveries from RecessionsSince WWII

Projected 2013 GDP Growth

Projected Growth  Lost Due to Sequestration

THE SEQUESTER WOULD COST THE ECONOMY OVER 1 MILLION JOBS IN 2013 & 2014 11

*The projection for jobs added averages the first five months of job growth in 2012 – 165,000 jobs/month – and assumes that level of growth continues through the end of 2014.

Sources: BPC calculations based on Bureau of Labor Statistics data and Congressional Budget Office projections and economic multipliers

‐2,000,000

‐1,000,000

0

1,000,000

2,000,000

3,000,000

4,000,000

Projected Jobs Added* in 2013 & 2014

Projected Jobs Lost in 2013 & 2014 if FY13 

Sequester Takes Effect

Net Jobs Added in 2013 & 2014 if FY13 Sequester 

Takes Effect

0%

20%

40%

60%

80%

100%

120%

140%

160%

2013 2018 2023 2028 2033 2038 2043

Public Deb

t as % of GDP

BPC February 2013 Alternative Baseline

Debt with Sequester

SEQUESTER DELAYS FEDERAL DEBT REACHING 100% OF GDP BY ONLY 2 YEARS 12

Note: The BPC Alternative Baseline assumes current law, except that: 1) funding for combat operations overseas winds down; 2) Medicare physician payments are frozen at 2013 levels (“doc fix”); 3) the sequester is waived; 4) expiring tax provisions areextended  as they have been in the past; and 5) aid for Hurricane Sandy is not extrapolated for future years.

Sources: Congressional Budget Office (February 2013) and Bipartisan Policy Center extrapolations

Fiscal Years

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• What is unique about FY 2013?• Cuts occur in the middle of the fiscal year.

• Discretionary cuts occur no matter what Congress appropriates.

• Sequester cuts happen at “program-project-activity” (PPA) level. But many departments don’t define what a PPA is.

• Across-the-board cuts difficult for many PPAs:• Accounts that are nearly all personnel costs, like those for Border

Patrol Agents

• Large procurement or construction projects

• Sequester will produce unintended costs• Higher per-unit procurement costs

• Increased future costs for delayed procurement

• Increased unemployment insurance

DIFFICULTIES IN IMPLEMENTATION OF FY 2013 SEQUESTER HOW MUCH WILL THE FY 2013 SEQUESTER CUT?

Dollar Cut(Billions)

Annual % Cut 7‐Month % Cuta

Non‐Defense $42.7

Discretionary $25.8 5.0% ≈9%

Medicare $11.3 2% 2%

Other Mandatory $5.5 5.1% ≈9%

Defense $42.7

Discretionary $42.6 7.8% ≈13%

Mandatory $0.1 7.9% ≈13%

Note: Percentage cuts are calculated from the total amount of non‐exempt resources in each category. Numbers may not add due to rounding.

a. This assumes that funds are obligated or spent roughly proportionally throughout the fiscal year. This will vary by agency , program, and category of spending. Because the sequester occurs five months into the fiscal year, these cuts must be made only from the remaining funds, resulting in larger percentage reductions.

Source: Office of Management and Budget estimates

IMPORTANT DOMESTIC PROGRAMS FACE AN 8-PERCENT CUT IN 2013 15

Program Continuing Resolution at FY 2012 Levels ($B)

Funds Available after March 1st ($B)

8% Sequester Cut($B)

Disaster Relief (includingHurricane Sandy)  $57.6 $33.6  $2.7

National Institutes of Health (NIH) $30.7 $17.9  $1.4

Section 8 Rental Assistance $27.4 $16.0  $1.3Air Transportation Security 

and Traffic Control $17.8 $10.4  $0.8Primary and Secondary Education (incl. for the 

disadvantaged) $15.7 $9.2  $0.7

Special Education $11.9 $6.9  $0.6

Scientific Research $11.8 $6.9  $0.6

Disease Control  $5.5 $3.2  $0.3

Food and Drug Safety $3.5 $2.0  $0.2

Mental Health Services $3.3 $1.9  $0.2Sources: Office of Management and Budget, Bipartisan Policy Center calculations

HOW DOES THE SEQUESTER AFFECT “OTHER MANDATORY” PROGRAMS? 16

Program FY 2013 Funding(Millions of $)

Sequester Cut(Millions of $)

Extended Unemployment Benefits $46,943 $2,394

Build America Bonds $3,351 $171

Rehabilitative Services and Disability Research

$3,231 $165

Citizenship and Immigration Services $2,859 $146

Mineral Leasing and Associated Payments

$2,144 $109

Social Services Block Grant (child care,foster care, disability services) $2,285 $117

Customs and Border Protection* $1,464 $75

Medicare and Medicaid Fraud Prevention** $1,296 $41

Sources: Office of Management and Budget, Bipartisan Policy Center calculations

*A majority of the funding for customs and border protection is annually appropriated. This chart only reflects the cut to the mandatory portion of that program’s funds.

**Because approximately $8 of fraud is prevented for every $1 expended on these activities, these cuts would substantially increase the deficit. 

IMPORTANT PENDING ISSUES 17

• PPA definitions

• Reprogramming & transfer authority

• Apportionment

PPA DEFINITIONS 18

• How they are defined will have significant impact on amount of flexibility for agencies & distribution of cuts

• BCA states that they are defined as in appropriations bills and accompanying reports

• Problem is that in many cases (i.e., for many agencies), these definitions don't currently exist

• Defense as example

• Well...how was it done in the 1980s?

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REPROGRAMMING & TRANSFER AUTHORITY 19

• Reprogramming = moving funds within budget account

Transfer authority = moving funds between budget accounts

• What are limitations on these?

• How much flexibility will they provide to the agencies?

APPORTIONMENT 20

• Office of Management and Budget (OMB) in charge of "apportioning" to agencies - i.e., telling them how much of their funding they can use in each quarter of the fiscal year

• Since sequester cuts must total $85 billion in FY 2013, but not till end of year, some of the cuts may be frontloaded, some backloaded, and others proportional

CONTINUING RESOLUTION, BUDGETS & DEBT LIMIT 21

• Continuing Resolution for Fiscal Year 2013 (which started October 1, 2012) expires on March 27

• If no new appropriations are passed before that point, the government will “shut down” (which is what happened multiple times in the 1990s)

• Markup of House and Senate budget resolutions and release of the President’s budget

• Debt limit