The Office of Management and Budget's Sequestration Report: An Analysis

On September 14, 2012 the President's Office of Management and Budget (OMB) released a report detailing the effects of the automatic across-the-board spending reductions, known as sequestration, scheduled to take place next January 2. These cuts result from the failure of the bipartisan "Supercommittee," which was created by the Budget Control Act of 2011 (BCA), to agree on $1.2 trillion in deficit reduction. For 2013, OMB estimated that the sequestration would result in a:

• 9.4 percent reduction in non-exempt defense discretionary resources;
• 8.2 percent reduction to non-exempt nondefense discretionary resources;
• 2.0 percent reduction to Medicare's resources;
• 7.6 percent reduction to other non-exempt nondefense mandatory programs;
• 10.0 percent reduction to non-exempt defense mandatory programs.

An analysis by the Peter G. Peterson Foundation that looks at all spending — and not just non-exempt spending — has found that the scale of reductions next year resulting from the sequestration will be more heavily weighted towards defense cuts than the above numbers suggest:

• Defense resources will be reduced by about 9 percent.
• The reductions to Medicare's resources will be 2 percent.
• Resources to other non-defense programs will be reduced by only 2 percent. That is because many non-defense programs will be spared cuts from sequestration.
• The sequester would reduce total budgetary resources by $109 billion or about 3.5 percent of total spending (excluding net interest).

In terms of total available budget resources, the sequester falls disproportionately on defense spending

SOURCE: Congressional Budget Office, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022, August 2012 and the Office of Management and Budget, OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 112-155), September 17, 2012. Compiled by PGPF.

The exemptions include major federal programs such as: Social Security benefits, benefits for veterans, funding for Medicaid and the Children's Health Insurance Program, and funding for military personnel (at the discretion of the President).

But in addition to the programs listed above, more than 100 smaller accounts throughout the budget are spared sequestration by the BCA, including the Overseas Private Investment Corporation, the Federal Crop Insurance Corporation Fund, and Pensions for Former Presidents.

The OMB report underscores one simple fact: automatic sequestration is not sound fiscal policy. To quote the report, "As the Administration has made clear, no amount of planning can mitigate the effect of these cuts. Sequestration is a blunt and indiscriminate instrument. It is not the responsible way for our nation to achieve deficit reduction."

How did our nation get here?

In exchange for increases in the debt ceiling, which limits the amount the federal government can borrow, the BCA reduced deficits through 2021 by imposing caps on future discretionary spending. It also created a bipartisan, bicameral Supercommittee to identify at least an additional $1.2 trillion in deficit reduction. If the Supercommittee failed to reach agreement or if its agreement was not enacted into law by the Congress and President, the BCA contained a "fallback" enforcement mechanism — automatic spending cuts to all programs that were not specifically exempted.

This set of across-the-board cuts was deliberately designed to be very undesirable for lawmakers from both political parties. It was meant to serve as a sword hanging over the heads of the members of the Supercommittee that would pressure lawmakers to develop a compromise package of deficit reducing measures. Unfortunately, the members of the Supercommittee became hopelessly deadlocked and sequestration now looms.

What happens next?

Unless the Congress and the President pass a law to delay or overturn sequestration, the President will issue an order on January 2 that will cut federal spending as detailed in the OMB report. That will reduce the projected 2013 deficit by about 8 percent according to the latest CBO estimates, but do so in a blunt and indiscriminate manner. On the other hand, if lawmakers simply overturn the reductions but do not take any steps to reduce our long-term structural deficits, they will reinforce the perception that our policy-makers are unable to address the central fiscal challenges facing our nation. What is needed is a bipartisan compromise on the budget with sensible changes in spending and tax policies that are implemented gradually as the economy recovers.