To Sequester Or Not Sequester

U.S. CapitolWhile U.S. equity markets were climbing higher on Tuesday, closing near record highs amid fresh market buzz over corporate merger activity, President Obama was busy making a speech from the White House to build more public support for Congress to take last minute steps to avoid the looming sequester cuts that are set to kick in on March 1st.

Because sequestration was enacted by Congress as a result of the Budget Control Act of 2011 which concluded the tumultuous 2011 debt ceiling crisis, it will take another act of Congress to undue the across the board sequestration cuts or sequester cuts that were originally intended to put the United States on a better fiscal path towards lowering its $16.4 trillion dollar federal deficit.

Still recovering from a fierce political battle last December during the “fiscal cliff” showdown, lawmakers in the House of Representatives will soon decide if they are ready to enter the ring again for Round II in budget negotiations over the unpopular sequester cuts.

However, Congress is currently in recess for the rest of this shortened week and won’t even return to Capitol Hill until next week to decide whether there is enough political will to advance new legislation to avoid the sequester cuts and avoid significant funding changes in critical areas such as the Pentagon’s budget or funding for Medicare providers.

The scheduled sequester cuts could also extend to funding reductions in other areas such as airport security, National Parks, Head Start programs for children, or student loan programs.

Unless Congress takes some immediate action before Friday March 1st, $85 billion in across the board sequester cuts for the 2013 fiscal year ending in September 30th will slowly become unveiled from Washington.

That amount totals $1.2 trillion over the course of 9 years from March 1, 2013 to Oct. 2021, a period of time that has often been described in some news outlets (including this one) as being 10 years.

Break It All Down

A sequestration of $1.2 trillion includes a reduction in spending levels over 9 years along with savings on interest on the national debt as a result of lower treasury expenditures.

The interest savings is estimated to be 18% of the $1.2 total, resulting in a deficit reduction target of $984 billion.

If divided over the span of 9 years, the $984 billion amounts to roughly $109 billion per year in annual sequester cuts.

If split evenly between defense and non-defense spending, as it was originally intended, the cuts equal $ 54.5 billion per year across both sectors.

However, the cuts may not end up being evenly divided and are still in the process of negotiation.

The Political Factor

House Republicans have not offered any new legislation to replace the sequester with alternative spending cuts after their failed House bill which expired last month. They remain intrinsically opposed to raising any new tax revenues following the December “fiscal cliff” deal that brings in $620 billion in new tax revenue by allowing the Bush-era tax cuts to expire for the wealthiest American families earning over $450,000 annually.

President Obama made it clear during yesterday’s White House speech that he is still ready to consider raising more revunues on the wealthiest Americans, primarily through tax reform measures by ending tax loopholes and tax deductions.

“I’m willing to save hundreds of billions of dollars by enacting comprehensive tax reform that gets rid of tax loopholes and deductions for the well off and well connected, without raising tax rates. I believe such a balanced approach that combines tax reform with some additional spending reforms, done in a smart, thoughtful way is the best way to finish the job of deficit reduction and avoid these cuts once and for all that could hurt our economy, slow our recovery, put people out of work” Obama said.

Obama said that if no final sequester agreement is reached before March 1st, then Congress should act to pass a smaller package of spending cuts and tax reforms to help buy more time to work out a larger framework for long-term sequester cuts.

“But if they can’t get such a budget agreement done by next Friday — the day these harmful cuts begin to take effect — then at minimum, Congress should pass a smaller package of spending cuts and tax reforms that would prevent these harmful cuts — not to kick the can down the road, but to give them time to work together on a plan that finishes the job of deficit reduction in a sensible way” Obama explained.



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