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POLICY INSIGHT
BEYOND THE NUMBERS

Replacing Sequestration With Equivalent Ten-Year Savings Makes Sense

Congressional budget negotiators are looking to replace some or all of the “sequestration” budget cuts for 2014 and perhaps 2015 with changes in mandatory programs, fees, or revenues that reduce program costs or raise fees and revenues over the next ten years.  There are good reasons to do so on a one-to-one basis — substituting every $1 of repealed sequestration cuts with $1 of ten-year savings from mandatory, fee, or revenue changes. Some Republican policymakers, however, reportedly argue that each $1 in sequestration relief for 2014 or 2015 should be offset by more than $1 in entitlement, fee, and revenue savings over the 2014-2023 period.  Such a demand is excessive and unwarranted. Here’s why replacing sequestration with equivalent ten-year savings makes sense: First, measuring savings over ten years is standard practice.  The Congressional Budget Office examines the fiscal impact of most legislation over a ten-year period and, when Congress seeks to pay for policies, it typically uses a ten-year period as its litmus test. Some may argue that replacing sequestration in the short term with savings in later years is unwise because the “out-year” savings are merely promises and may never materialize.  But, that’s incorrect:  the out-year savings would be the law of the land and would take effect unless policymakers undid them — which would require approval by the House, the Senate (probably with 60 votes), and the President.  This would prove extremely difficult because proponents of any legislation to undo these savings would surely face political pressure to find equivalent alternative savings. Second, changes in revenue and entitlement law would typically be permanent.  Unlike the one or two years of sequestration cuts they would replace, permanent changes to revenue and entitlement law would continue to reduce deficits beyond ten years.  A package of permanent changes that produces $1 in entitlement, fee, or revenue savings over the first ten years for every $1 in short-term sequestration relief would, for example, generally produce $2 or more in savings for every $1 in sequestration relief if measured over 20 years. For example, assume that negotiators replace $100 billion of sequestration cuts over the next two years (2014-2015) with changes in entitlements, fees, and revenues that save $100 billion from 2014 through 2023.  Over ten years, the entitlement cuts and increased fees and revenues would fully offset the additional $100 billion in program funding from easing sequestration in 2014 and 2015.  To the extent these changes were permanent, they would yield further savings every year after 2023, while the higher program funding provided in 2014 and 2015 would not continue beyond those years. Over the long term, then, permanent savings would produce far more deficit reduction than continuing sequestration as currently in law. Replacing short-term savings with savings in later years also provides economic advantages.  The recovery from the Great Recession remains anemic, and sequestration is a significant drag on job growth, as the Congressional Budget Office has reported.  Economically, it would be better to delay budget cuts to years when the economy will be stronger and better able to absorb them. In addition, savings from permanent changes in mandatory programs and revenues would lower the budget deficit in the decades after 2023, when debt as a percent of the economy is projected to be higher and the need for deficit reduction will be greater. Sequestration is harming important public services and essential government functions and creating unhelpful fiscal headwinds for our still-struggling economy — thereby costing hundreds of thousands of jobs.  Replacing the ill-targeted and ill-timed cuts scheduled for the next couple of years with smarter deficit reduction that shifts cuts to later years makes fiscal and economic sense.