CBO Joins Chorus of Warnings About Risks of Sequestration

If the nation falls off a “fiscal cliff” on January 2, it won’t be for lack of warnings about the dire consequences.  The Congressional Budget Office (CBO) joined the chorus yesterday.

CBO, a non-partisan legislative branch agency that is part of Congress and provides its own economic forecasts independent of the White House Office of Management and Budget (OMB), said yesterday that if Congress does not act before the end of the year, the country could be thrown into a recession.

One of the top worries is the automatic across-the-board spending cuts — sequestration — that will happen on January 2, 2013 unless Congress changes existing law.   The Budget Control Act, enacted almost exactly one year ago, calls for cutting federal spending by another $1.2 trillion by 2021.   The cuts would be split equally between defense and non-defense agencies, with each shouldering about $500 billion in cuts.  The rest would be saved by paying less interest on the debt.

Rough estimates are that all the government activities categorized as discretionary spending, including DOD, NASA and NOAA, would be cut by about 8 percent.  Each program, project or other activity would be cut by the same amount rather than based on their merit or need.   The sequester was included in the Budget Control Act as a “poison pill” to motivate a special congressional supercommittee to reach agreement on some alternative, but its members threw in the towel last fall because Republicans and Democrats could not agree.  Republicans insist that deficit reduction be accomplished through spending cuts only; Democrats want a combination of spending cuts and tax increases focused on wealthier individuals.

The White House, congressional Democrats and congressional Republicans have been raising the alarm about the calamitous consequences of cutting defense spending by another $500 billion since the beginning of the year, but seem no closer on reaching agreement on how to avoid it.  The implications of cutting the rest of discretionary spending, such as NASA and NOAA, are hardly ever discussed, but could be equally dire.  

In addition to the sequester, the Bush-era tax cuts and the payroll tax holiday will expire on December 31, raising taxes on many Americans.   CBO said the combination of tax increases and spending cuts would result in good news and bad news.  Good news: the deficit would shrink from $1.1 trillion to $641 billion.  Bad news:  “such fiscal tightening will lead to economic conditions in 2013 that will be probably be considered a recession, with real GDP declining by 0.5 percent … and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.”

On August 7, President Obama signed into law the Sequestration Transparency Act that requires OMB to report to Congress on how it would implement the sequester if it goes into effect.   Until now, the Administration has been holding Congress’s feet to the fire to agree on an alternative, but lacking any progress on that front, acquiesced to providing a plan by next month.  OMB’s report is due 30 days from when the law was signed, which means it should be on the desks of House and Senate members when they return from their 5-week recess on September 10.

None of the 12 FY2013 appropriations bills has cleared Congress yet.  Agreement was reached last month to pass a 6-month Continuing Resolution instead.  That takes the FY2013 appropriations issue, at least, off of Congress’s plate for the lame duck session between the November 6 elections and the end of the year.  While that should give them plenty of time to focus on the larger issues of sequestration and taxes, whether it is enough time largely depends on the outcome of the election.