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Spending Cuts to Start Friday in U.S. Without Compromise

Photographer: Andrew Harrer/Bloomberg

Democrats, including U.S. President Barack Obama, are recommending that a mix of tax increases and spending cuts replace sequestration. Close

Democrats, including U.S. President Barack Obama, are recommending that a mix of tax... Read More

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Photographer: Andrew Harrer/Bloomberg

Democrats, including U.S. President Barack Obama, are recommending that a mix of tax increases and spending cuts replace sequestration.

U.S. lawmakers have four days to avoid the start of across-the-board government spending cuts, known as sequestration. So far, there is little indication that President Barack Obama and congressional Republicans will reach an agreement this week.

Here are questions and answers about the cuts and where talks stand:

What is sequestration?

It’s the official name for the automatic federal spending cuts that will begin March 1. Sequestration will reduce projected spending by $85 billion over the final seven months of this fiscal year and by $1.2 trillion over the next nine years. Half of the cuts will affect defense spending; the remainder will be spread over other federal agencies.

Why has Congress come so close to the deadline?

Lawmakers can’t agree on how to prevent sequestration from starting.

Will there be immediate effects on March 1?

Probably not, in many cases. Agencies have had five months -- since the start of the fiscal year Oct. 1 -- to plan for changes, so the effects may be gradual. That makes sequestration different from a partial government shutdown like the ones that occurred in 1995 and 1996.

What are the consequences for government services?

Under sequestration, the Pentagon would furlough up to 800,000 civilian employees, requiring them to take unpaid time off. Employees must be given 30 days’ notice. Cuts at the Federal Aviation Administration and the Transportation Security Administration could mean delays at airports. Spending on child nutrition and housing vouchers also would be reduced.

What are some specific cuts that could happen?

The FAA would probably close more than 100 air-traffic control towers, Transportation Secretary Ray LaHood said Feb. 21. The Coast Guard would reduce its presence in the Arctic by one third, Homeland Security Secretary Janet Napolitano said Feb. 14.

What are the economic consequences if Congress does nothing?

By year’s end, sequestration would reduce the gross domestic product by 0.6 percentage points and cost 750,000 jobs, according to the Congressional Budget Office. The median forecast of economists surveyed by Bloomberg last week calls for a loss of 0.5 percentage points of GDP and 350,000 jobs.

Do the cuts affect all federal spending?

No. Military pay and veterans benefits are exempt, as are Social Security benefits. Payments to Medicare providers would be cut less than other spending, with a maximum of 2 percent. Those exemptions create a disproportionate effect in other areas of the budget, such as defense contracts, meat inspection and national parks.

How big are the automatic cuts?

Compared with annual spending, the cuts will be about 8 percent for defense programs, Danny Werfel, controller at the Office of Management and Budget, told a Senate committee Feb. 14. Non-defense programs face about a 5 percent cut. Because the first year’s cuts would be made over the final seven months of fiscal 2013, the effective reductions would be about 13 percent for defense programs and 9 percent for non-defense programs, Werfel said in a Feb. 8 briefing.

How do agencies decide what to cut?

The law requires them to make equal cuts in every program. Agencies with contractual agreements they can’t break or those that spend a large share of their costs on staff may have little choice other than to implement furloughs.

“Every account has to be cut by a certain percentage,” Werfel said Feb. 8. “It’s not like the agencies can move money amongst accounts.”

Why can’t Congress stop these cuts from happening?

With a few exceptions, lawmakers say they want to avoid sequestration because its across-the-board nature is a poor way to make choices about spending cuts. The issue is that they don’t agree on how to do it.

What do Democrats want?

Democrats, including Obama, are recommending that a mix of tax increases and spending cuts replace sequestration. Obama says he wants to pursue a broader budget deal that would include a rewrite of the tax code and some cuts to health care programs.

What do Republicans want?

Republicans, noting that tax rates for top earners rose Jan. 2, say they won’t accept additional revenue as a way to replace the deficit reduction from sequestration. Instead, they say spending cuts alone, particularly in entitlement programs such as Medicare and Medicaid, should be the solution.

Have financial markets been affected?

Unlike during the tax negotiations in November and December, stocks and Treasury bonds haven’t reacted instantly to statements from congressional leaders. The Standard & Poor’s 500 Index has increased 6.1 percent so far this year, as of 1:13 p.m. today in New York. Yields on the benchmark 10-year U.S. Treasury bond increased to 1.96 percent on Feb. 22 from 1.76 percent on Dec. 31, according to Bloomberg Bond Trader prices.

Defense contractors have seen slower growth. The Standard & Poor’s Aerospace and Defense Index gained 6.8 percent in the past 12 months, trailing the 11.6 percent gain for the broader Standard & Poor’s 500 Index.

Will Congress vote?

The Senate is scheduling a vote as soon as this week on a $110 billion plan that would delay the cuts until January 2014. The plan relies half on spending cuts, such as ending some farm subsidies, and half on higher taxes, primarily a minimum 30 percent tax rate on top earners. The tax provision is known as the Buffett Rule after one of its leading proponents, billionaire Warren Buffett. Republicans are expected to block the proposal from coming to the floor for an up-or-down vote.

What about the House?

House Speaker John Boehner, an Ohio Republican, says he will consider anything the Senate passes. Last year, the House twice passed bills to delay the automatic cuts and replace them with other spending reductions. Those bills expired when the new Congress began Jan. 3.

Would Congress be affected by the cuts?

Yes. The legislative branch would be treated like any other agency with cuts to such things as committee budgets and building maintenance. Lawmakers’ salaries wouldn’t be affected.

Why did Congress create sequestration?

Because lawmakers couldn’t come up with a better option. In August 2011, as they debated an increase in the federal debt ceiling, Republicans were demanding spending cuts equal to the size of the debt limit. Obama wanted a debt limit increase of more than $2 trillion to get past the 2012 election. Lawmakers agreed to cut about $900 billion up front and do the rest through sequestration, intending to create an outcome so unpalatable that they would come up with a way to avoid it.

Why is it called sequestration?

The name stems from a 1985 deficit-reduction law, when the across-the-board cuts were first enacted to ensure that Congress would act. In 2011, the administration proposed -- and Republicans accepted -- sequestration as the backstop to deficit reduction if a 2011 supercommittee and regular congressional rules didn’t produce results. They didn’t.

Is this the only fiscal feud?

No. A temporary measure extending government spending expires March 27, and failure to act would cause a partial government shutdown. Several months after that, the U.S. will again approach the debt limit. Any resolution to sequestration could include provisions that would address the other deadlines.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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