The Fiscal Cliff Needs a Bridge

Sequestration is in effect. Unless an agreement can be reached, on January 1, 2013 the U.S. Government will face steep, across the board, automatic budget cuts. The only way to avert this is to broker a deal that can be agreed upon and passed in both the House of Representatives and Senate, and signed by the President.

As part of the Budget Control act of 2011, automatic spending cuts were built in to take effect in the event that the Joint Select Committee on Deficit Reduction failed to achieve $1.2 trillion in savings over 10 years. The committee failed and now legislators are hurrying to find a solution to prevent the $1.1 trillion in automatic spending cuts to occur over the next 10 years.

The Bush tax cuts were not part of the Budget Control Act of 2011. However, since they were scheduled to expire, their expiration was built into the base line of the mandated $1.2 trillion in savings. In other words, the committee had to find savings elsewhere.

The automatic $1.1 trillion of cuts includes no tax increases, but as the Bush tax cuts will also expire at the beginning of the year, the two issues have merged on the bargaining table. From this point, any likely bargain would include some combination of increased tax revenue (possibly by closing deductions) and some spending cuts (probably not as deep as the $1.1 trillion).

The automatic spending cuts are weighted heavily toward defense. They are divided 50-50 between defense and non-defense, which includes both discretionary, some Medicare, and some other mandatory payment cuts. As a result, defense would see a higher percentage of cuts relative to its current budget. The two categories (defense and non-defense) would each face cuts in the area of $54.7 per year through 2021.

Additional Resources

The Wall Street Journal, Why Obama Pushes Higher Rates vs. Deduction Limit: http://blogs.wsj.com/washwire/2012/11/19/why-obama-pushes-higher-rates-vs-deduction-limit/

Research America, Health Research Sequestration Report: http://www.researchamerica.org/uploads/RASequestrationReport.pdf

H.R. 4966 Sequester Replacement Act of 2012: http://www.gpo.gov/fdsys/pkg/BILLS-112hr4966rh/pdf/BILLS-112hr4966rh.pdf

Keith Hennessey, Quick Summary of the Budget Control Act: http://keithhennessey.com/2011/08/01/bca-summary/

Office of Management and Budget, Sequestration Reports: http://www.whitehouse.gov/omb/legislative_reports/sequestration

Congressional Budget Office, Sequestration Reports: http://www.cbo.gov/topics/budget/sequestration-reports

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