Spotlight

Striking the Deal

September 07, 2012

By Russell Rumbaugh - Defense spending and the issue of sequestration are again in the public debate, as the presidential election campaign moves into high gear, and the start of a new fiscal year looms on October 1. Sequestration - automatic, across-the-board budget cuts of 10 percent contained in the Budget Control Act of 2011 - is primed to take effect January 2, 2013, unless other action is taken. Despite the bickering over the effects of sequester on defense, almost everyone agrees defense sequester should be waived.

Sequester would be implemented-in accordance with the relevant budget laws-by taking a uniform percentage reduction from every program, project, or activity, and the President or Secretary of Defense would have little flexibility to move funding from one activity to another. 

Many defense analysts predict that sequestration is not going to go into effect.  Most assume the alternative is to postpone when sequester will take effect.  But the circumstances to realize a long-term deal are in place for the post-election lame duck Congress, provided the President wins the election.  If the President loses his bid for re-election, a punt is the most likely until the President-elect has time to formulate his own plan.  

Because sequester is the law of the land, the Congress and President must take positive action to prevent sequester from happening.  That is also true of any modification of sequester's effects.  The President can propose modifying how sequester is applied to defense programs, provided he achieves the same level of savings.  Congress must still positively approve such changes, meaning for sequester to be waived or even modified, Congress must act and act before January 2nd.

A deal need not be a grand bargain, wrapping together entitlement reform, tax reform, and waiving sequester to finalize discretionary spending levels.  A deal instead repeals sequester as part of an agreement that may claim to set the stage for a grand bargain later, but in the end serves as the framework for the next couple of years. 

Of the many issues on the table, three are key:

  • Waiving sequester's effects on defense discretionary spending;
  • Extending the Bush-era middle class tax cuts; and,
  • Extending the Bush-era tax cuts for the wealthy. 

Almost everyone agrees defense sequester should be waived, and for good reason.  The cut would be roughly 10 percent.  The defense budget has not been cut that much in one year since the end of the Korean War.  This consensus on defense brings what happens this fall back to the fundamental question of revenue, which has coalesced around whether or not to extend the tax cuts for the wealthy.  The President has said he would veto any bill that extended the tax cuts.  And the Senate has already taken test votes on exactly this issue, with 51 Senators voting to extend only the middle class tax cuts, and only 45 voting to extend both the middle class and wealthy tax cuts.  The Senate votes are not quite decisive, but do draw fairly clear lines for two of the three actors.  On the other side, the leadership of the Republican-held House of Representatives has said all the tax cuts should be extended.

But that does not mean the issue will end in a draw.  The impending sequester cuts to defense create a powerful motivation to pass something.  Though it will likely take quite a bit of legislative maneuvering possibly including a veto by the President, that pressure can still lead to a move by the House to repeal sequester, extend middle-class tax cuts, but not extend tax cuts for the wealthy.  Moreover, passing such a bill would not require a complete about-face by all Republicans.  If all House Democrats voted for it, only about 25 Republicans-depending on the outcome of a few special elections-would need to decide they care more about national security than tax cuts for the rich.  Both are solid planks in the Republican platform, but 25 out of 200 representatives siding with national security does not seem unreasonable. 

There is a misperception that waiving sequester would require replacing the lost savings.  Everyday budget rules would require offsets, but there is nothing specific about the sequester law that gives the $1.2 trillion any special relevance, and budget rules are waived regularly.  Moreover, the Office of Management and Budget (OMB) estimates that not extending tax cuts for the wealthy would raise $1 trillion in revenue.  That revenue does not help with the budget rules, as it is already assumed because by law the tax cuts are set to expire.  But $1 trillion does provide a fairly robust political justification for offsetting the sequester effects.  More savings also could be achieved as a sop to repealing sequester by lowering the caps created by last year's budget legislation.  In the 1990s, caps were easier to extend once everyone got used to the new levels.

A similar dynamic is at play today.  Whereas last year the talk was of swings of $25 billion in defense spending between the most generous funding proposal and the least generous proposal, this year the difference between the President's defense proposal, the lowest, and the House's defense appropriation, the highest, is only $1 billion.  Such basic agreement opens up the possibility of lowering the caps a tad more.  The Chairman of the Senate Armed Services Committee has already floated the idea of an additional $10 billion cut.   That or a similar cut could be incorporated into lower spending caps.

Sequester of defense spending is so scary a prospect that it may help resolve the more fundamental question of whether to extend tax cuts for the wealthiest Americans or not.  The debate is not going to get easier as time passes.  The forces requiring action all come due before the start of the new year, suggesting this fall we will see not just a punt on sequester but an actual deal.  Unfortunately, such a deal likely erodes the leverage for a broader grand bargain. 


Photo Credit: Pen Waggener via Flickr, http://www.flickr.com/photos/epw/2871259404/

Written by

  • Russell Rumbaugh
    Director, Budgeting for Foreign Affairs and Defense, and Senior Associate