Sequestration Update: Impact of President Obama's "It Will Not Happen" Assertion

President Obama’s statement during Monday’s presidential debate that the sequester “will not happen” surprised a lot of people.  Washington is abuzz about what he meant — one of his aides quickly walked it back, saying that everyone believes it SHOULD not happen — and what it all means for deal-cutting to avoid the “fiscal cliff” when Congress returns.

The looming across-the-board $1.2 trillion cut to defense and non-defense budgets over 10 years — sequestration — that will begin on January 2, 2013 unless Congress changes the law have been a source of angst for government agencies and government contractors alike for the last year. The blame game continues, with Republicans insisting that sequestration was the President’s idea and the President insisting it was Congress’s idea. The fact of the matter is that it is part of the Budget Control Act, passed by Congress and signed into law by the President in August 2011, so both are responsible.

Sequestration was included in the law as a “poison pill” to motivate a special congressional “supercommittee” to find another way to cut the deficit. They failed a year ago, unable to find a compromise between Republicans who want to reduce the deficit only by cutting spending and Democrats who want a combination of spending cuts and tax increases. Then, earlier this year, House Republicans reneged on the part of the agreement that called for cuts to defense spending while continuing to insist on the $1.2 trillion total in deficit reduction and have made it a major issue in election-year politics.

It is a major theme of Republican presidential candidate Mitt Romney’s campaign.  Romney claims the President would cut military spending by $1 trillion over 10 years through a combination of sequestration and other spending cuts.  Sequestration alone would cut about $500 billion from defense spending.  (It would also cut about $500 billion from non-defense agencies like NASA and NOAA; the remaining $0.2 trillion would be saved by the consequent reduction in interest on the debt).

President Obama was responding to such an assertion by Romney in Monday’s debate, saying “First of all, the sequester is not something that I’ve proposed.  It is something Congress has proposed.  It will not happen.”

Congressional Republicans were quick to point out that the President needs agreement from Congress to avoid sequestration.  Senator John McCain, a sharp critic of the Obama Administration’s decision to tell major defense contractors like Lockheed Martin they do not need to send out layoff notices as would be required ordinarily under the Worker Adjustment and Retraining Notification Act (WARN), said the President was “not a dictator yet” according to Politico.  Other Republicans chastised the President for not showing leadership in dealing with the issue to date.

Sequestration was expected to be a major component of whatever deal-cutting is needed by the end of the year to avoid the so-called fiscal cliff, a term that refers to a number of automatic economic changes that will occur unless Congress acts.   It includes the economic impacts of not only the sequester, but the expiring social security payroll tax holiday, the expiration of the Bush-era tax cuts, and a laundry list of other expiring tax breaks that, if they all happen, could throw the country into turmoil.

The President earlier indicated that he would use the sequester as leverage to get Congress to agree to extend the Bush-era tax cuts only for those earning less than $250,000.  By saying on Monday that the sequester “will not happen,” he loses that leverage.  What happens next is anyone’s guess, but until now the prevailing view has been that  — whoever wins the White House — the issues are too complex to deal with in the short remaining time between the elections and January 2 and the likely outcome would be agreement to delay when sequestration takes effect.  Whether the President’s “it will not happen” remark changes those odds remains to be seen.