Government & Public Affairs Update from the Offices of Clark Hill
The Sequestration Battle: A Primer
Upon returning from elections, Congress finds itself with the daunting task of forging a bipartisan consensus addressing looming sequestration cuts, or as also known, the "fiscal cliff" deadline.
If sequestration cuts are not delayed the consequences could be disastrous for the U.S. economy. A combination of an across-the-board spending reduction of $1.2 trillion over the next nine years and the expiration of the Bush tax cuts is viewed by many as a potential catalyst for plunging the U.S. economy into a new recession. Not only will public agencies be forced to undertake massive layoffs, private sector industries which rely on the government for a large portion of their business will find their opportunities to be severely curtailed. Defense contractors and IT firms are expected to be heavily impacted.
To avoid sequestration cuts lawmakers have two options. Congress can attempt to pass a broad deficit reduction bill which covers defense spending, tax reform, and domestic entitlement programs such as Medicare before January 2, 2013. The likelihood of a lame-duck Congress coming together to negotiate and agree on such legislation, while preferred, is unlikely. The second option to avoid sequestration cuts requires Congress to pass a smaller piece of legislation which postpones both the sequester and the expiration of the Bush tax cuts. Such a measure would effectively provide a bridge for legislators to come together in the new Congress and negotiate a broad-scale deal. Speaker John Boehner has stated he is willing to undertake negotiations on large scale deficit reduction legislation, yet has indicated this would take place after the new Congress convenes. Therefore, there is a likelihood that if sequestration cuts are to be avoided on January 2, it will be likely due to a negotiated delay.
The likelihood of a compromise that prevents sequestration cuts hinges on the ability of both parties to compromise on key issues. Democrats have insisted on a package which increases tax revenues, a measure that had been met with opposition by Republicans. More recently, Republicans have displayed a willingness to discuss raising additional revenues by eliminating existing loopholes instead of through tax increases. Conversely, Democrats will have to consider adopting measures that bring reductions to entitlement spending.
At a minimum, Congress must enact temporary legislation which suspends sequestration cuts from taking place on January 2, 2013. Nevertheless, until a long term deficit reduction compromise is agreed upon, the threat of mandatory across-the-board deficit cuts will continue to loom large over the budgetary horizon.