GovSpeak: “Sequestration”

Sequestration—originally a legal term referring to an agent of the court taking valuable property into custody to prevent it from being disposed of or abused before a dispute over its ownership can be resolved—has been adapted by Congress in more recent years to describe a new fiscal policy procedure first provided for by the Gramm-Rudman-Hollings Deficit Reduction Act of 1985.  If the many separate appropriation bills passed by Congress call for the federal government to spend a total amount higher than the limit set by Congress in its annual budget resolution, and if Congress cannot agree on ways to cut that total—or does not pass a higher budget resolution—then an “automatic” form of spending cutback takes place.  This automatic spending cut is called “sequestration.”

Sequestration therefore is the process through which across-the-board spending cuts would be applied to government programs in a uniform fashion to meet budget reduction goals. It was agreed to through the Budget Control Act of 2011 when a “supercommittee” (the Joint Select Committee on Deficit Reduction) failed to strike a deal on $1.2 trillion of savings.  This legal requirement of the Budget Control Act will kick in on January 2, 2013—if Congress cannot reach agreement before then about the $1.2 trillion in cuts or added revenue needed over the next decade (including roughly $98 billion in FY2013 alone), and if it does not pass legislation to undo the legal requirement for sequestration—or if President Obama fails to sign that legislation.  If that does not happen, on January 2 the federal government must begin imposing the first of ten years of across-the-board discretionary spending cuts for defense ($500 billion) and non-defense ($700 billion) budgets.

Under sequestration, an amount of money equal to the difference between the cap set in the budget resolution and the amount actually appropriated is “sequestered” by the U.S. Treasury and not handed over to the agencies to which it was originally appropriated by Congress. In theory, the same percentage would be withheld from every agency.  Congress, however, has chosen to exempt some enormous programs from the sequestration process—including parts of the Defense budget, Medicaid, unemployment insurance, Social Security, and more—meaning that sequestration would have to take back devastatingly large shares of the budgets of the remaining programs in order to achieve the total cutbacks required.  Broadly speaking, the across-the-board cuts are expected to result in roughly an 8.4 percent cut in most affected non-defense discretionary programs, a 7.5 percent cut in affected defense programs, an 8.0 percent cut in affected mandatory programs other than Medicare and a 2.0 percent cut in Medicare provider payments for FY2013.

Most House Republicans voted today (Thursday, May 10) to override the steep defense cuts that would be mandated by sequestration and replace them with spending reductions to food stamps and other mandatory social programs.  The Sequester Replacement Reconciliation Act passed by a 218–99 vote; only 16 Republicans opposed it and no Democrats supported it.  This “butter for guns” swap faces a veto threat from the White House and rejection by the Democratic Senate, both of which claim that the GOP measure unfairly targets the middle class and the poor.  The resulting deadlock is highly unlikely to be resolved before Election Day.  This means that a legislative “perfect storm” could develop in December, when a lame duck Congress may be faced with approving a continuing resolution to cover FY2013 appropriations, the need to increase the debt ceiling, and legislation to stave off sequestration.

Want Capitol Markets articles delivered straight to your inbox?