Revised Version: Obama Administration Details Sequestration Cuts
September 19th, 2012
On Friday, September 14, the White House Office of Management and Budget (OMB) released a preliminary outline of how it would implement automatic budget cuts (known as sequestration) across government programs, as required by the Budget Control Act of 2011 (BCA).
In early August 2012, Congress passed the Sequestration Transparency Act of 2012, which forced the Obama Administration to release the report. For unknown reasons, the Administration has been reluctant to release the information since passage of the BCA in August 2011.
Background in Brief
As mandated by the BCA, budget sequestration consists of across the board cuts, evenly split between defense and non-defense spending, and spread over nine years. Cuts are allocated across discretionary and mandatory spending programs on a pro rata basis relative to the underlying cost of each program, though many mandatory programs are exempted.
If sequestration is allowed to take place, some $109.3 billion will be cut each year from FY 2013 through FY 2021, for a total of $984 billion. Half the total is to come from defense spending and the other half from non-defense spending. How these cuts more precisely impact farm bill mandatory spending and agricultural appropriations discretionary spending is described below.
The process is set to kick in on January 2, 2013, and is the result of the collapse of the Joint Select Committee on Deficit Reduction (also known as the “Supercommittee”), which failed to produce a deficit reduction plan last year.
In the introduction to the report, the Obama Administration makes clear its dislike of sequestration as a budget enforcement tool, saying it is “bad policy” and “a blunt and indiscriminate instrument” and noting it has offered various proposals to save comparable amounts through more rational policies. The two parties have remained at loggerheads over how to proceed, though both profess to want to avoid sequestration.
Overall Sequestration Math
Based off of its review of federal spending, the BCA, and the extensive, outdated, and imprecise list of exemptions to sequestration that date back to the mid-1980s, OMB has determined that non-exempt discretionary defense spending would be reduced by 9.4 percent and non-defense discretionary spending by 8.2 percent. Non-exempt mandatory spending would be reduced by 7.6 percent, defense mandatory spending by 10 percent, and Medicare spending by 2 percent.
Farm Bill and Agricultural Appropriations Math
Farm Bill – OMB’s sequestration report gives us our first official glimpse at what the impact of sequestration would be for the annual appropriations process and for the farm bill. Before Friday, many observers believed, based on informal congressional and administrative estimates, that sequestration would result in automatic cuts of roughly $15-$16 billion to farm bill programs over the course of the next decade.
Our analysis of the sequestration report makes it clear that the actual size of the cut would be much smaller, about $7 billion, including approximately $4 billion from commodity programs (excluding the commodity loan programs, which the report lists as exempt) and $2.3 billion from conservation programs (excluding the Conservation Reserve Program, which is exempt), with the remainder primarily in very small amounts from food purchasing and nutrition programs.
(Note: These estimates are achieved by using the BCA mandatory spending reduction percentages each year and applying them to the current Congressional Budget Office baseline for each of the years 2013-2021 for commodity and conservation payments, and then adding the additional farm bill-related mandatory spending reductions listed in the new report.)
The biggest difference between previous estimates and the final figures from OMB is crop insurance subsidies. While the sequestration statute exempts “prior legal obligations” of the Federal Crop Insurance Corporation from sequestration, OMB opts to exempt nearly all crop insurance subsidies from automatic cuts, reducing the total hit on the farm bill by at least $5 to 6 billion, and possibly more if crop insurance subsidy costs continue to climb.
This decision to call all future crop insurance obligations “prior” would appear to be a political decision, not a legal one. Indeed, based on personal communications over the course of many months with budget staffers, it appeared to us that the decision on crop insurance premium subsidies had gone the other way during earlier OMB technical reviews. Whether any further explanations will be provided by the Administration remains to be seen, though we tend to doubt anything more will be said or revealed.
In comparison with the pending 5-year farm bills, the size of the automatic cuts under sequestration pale in comparison to those in the Senate-passed bill and House Committee-passed bills. The Senate farm bill would cut $23 billion in total over the next decade. Even after subtracting the cuts to food stamps and the CRP (since they are exempt under sequestration) and adding in the new spending proposed for crop insurance and other titles of the farm bill, the Senate bill would still slice off $15 billion, or more than twice the level of the automatic cuts in an apples to apples comparison. The House farm bill would cut $35 billion, but again on an apples to apples comparison with sequestration, its cut would also be about $15 billion.
It has long been assumed that if a long-term farm bill were to pass and become law while sequestration was still the law of the land, the final farm bill would contain a provision to exempt farm bill accounts from sequestration, having gone further in terms of total savings than required by the automatic cuts.
Agricultural Appropriations – It is less complicated to analyze the impact of sequestration on agricultural appropriations. All USDA discretionary line items would be cut by 8.2 percent in FY 2013. The percentage and the absolute dollar amounts of the cuts assume that Congress keeps appropriations on autopilot at 2012 levels. The numbers change if and when Congress adopts actual appropriations bills (adjusting accounts on an annual basis) rather than simple renewing the continuing resolution (keeping current spending constant).
Overall, the approximately $22 billion a year agricultural appropriations bill — which covers all of USDA except for the Forest Service, plus the Food and Drug Administration, Commodity Futures Trading Commission, and the Farm Credit System — would be reduced by some $1.9 billion in FY 2013.
Given that the WIC, or Women, Infants, and Children feeding program, is nearly a third of the total agricultural appropriations bill each year, it is not surprising that it would take the biggest cut, at $543 million. The FDA (including both drug and food safety activities) would be set back by $318 million. The already reeling agricultural research and extension budget and rural development budget would be set back by $210 million and $196 million, respectively. International food aid would be cut by $150 million. Other major cuts would fall on Farm Service Agency credit programs, Natural Resource Conservation Service conservation operations, and Food Safety Inspection Service meat inspections.
These discretionary program automatic cuts happen only for FY 2013. After that, for the following eight years, there will not be an automatic cut, but rather the cut to discretionary spending will be made in the grand total available to the appropriations committees. The decision on how to allocate spending within the cap will be left up to the regular appropriations process. The overall cap on appropriations will grow, but at a reduced rate relative to normal adjustments to keep pace with current services and inflation. Thus, it is not possible to predict the exact nature of USDA and FDA funding in the years after 2013, though clearly funding caps would be considerably tighter than would be the case without the BCA.
Will Sequestration Happen?
That is the $1.2 trillion question. For nearly two years, Congress has faced the question of reaching some type of long-term budget deal that would start the process of reducing the federal debt by adjusting taxes and tax loopholes, entitlement spending, and other government programs in a way that would force a greater degree of fiscal discipline over the coming years. Yet market indicators suggest that too much fiscal restraint now could stall the already slow economic recovery. Additionally, the partisan divide has left a political solution to sequestration all but impossible to reach.
It is now widely assumed that Congress will “de-trigger” sequestration, at least for 2013, when it returns for its lame duck session after the elections in November. That issue and other major decisions — on extending the Bush tax cuts, tax incentives, the annual alternative minimum tax fix, and Medicare reimbursement rules, among others — form the so-called “fiscal cliff” that could put the economy in reverse should the lame duck Congress decide to fall off the cliff rather than reach a new accord.
Lurking not far in the background of the fiscal-cliff suite of issues is the new long-term farm bill and a move to take 2013 appropriations off of autopilot and finish the job of new appropriations bills, including agriculture. Both of these issues could easily be dealt with during the lame duck session if Congress, and especially the leaders of the House majority, were so inclined. Whether that will be the case, however, is a very open question.