Shaping a Deal to Replace Sequestration

As congressional negotiators discuss replacing part or all of sequestration for the next year or two with alternative deficit-reduction measures, our new report outlines three features of a well-designed agreement:

• Any relief from sequestration should be evenly split between defense and non-defense programs. This is necessary to maintain the principle of parity that the 2011 Budget Control Act (BCA) established when it divided the sequestration cuts evenly between defense and non-defense programs.
• The savings needed to replace sequestration should come from both spending cuts and revenues. Some have proposed that the sole financing mechanism for replacing sequestration cuts should be domestic entitlement cuts.  This would mean that domestic entitlement cuts would replace both defense and non-defense sequestration cuts.  Under this approach, the net result would be much larger overall cuts in non-defense programs than under sequestration alone.  Policymakers should identify tax loopholes to close and other savings outside of domestic entitlements that, at a minimum, can replace the defense sequestration cuts.

  Of particular concern, using non-defense entitlements as the sole source of savings for even a year or two of sequestration relief could set a dangerous precedent for any future deal for sequestration relief.  Replacing all eight years of sequestration (2014-2021) would require about $900 billion in savings.  Entitlement cuts of that magnitude would almost certainly require cutting benefits in key programs that serve millions of low- and moderate-income children, seniors, people with disabilities, and families that work for (or have earned) modest wages — programs such as Social Security, Medicaid, Medicare, and SNAP.

  Thus, a more balanced set of deficit-reduction measures will be needed to replace sequestration over the coming decade.  Policymakers should start down that path now, rather than set a deeply troubling precedent.

• Policymakers should design sequestration relief to help the still-struggling economy. Sequestration is acting as a drag on the recovery.  The Congressional Budget Office (CBO) states that if policymakers canceled sequestration for 2014, the economy would have the equivalent of 800,000 more full-time jobs, and real (inflation-adjusted) gross domestic product (GDP) would be 0.6 percent larger, in the fourth quarter of next year than under current projections.  Replacing sequestration for 2014 and 2015 with measures that produce equivalent savings over the decade, but phase in more gradually, would both help the economy now and provide more deficit reduction than sequestration over the longer term.

As the report explains:

Policymakers have an opportunity to strengthen the economy and undo some or all of the sequestration cuts for the immediate future by replacing them with better designed, better timed deficit-reduction measures.  If those measures include both revenues and spending cuts and provide relief to non-defense areas as well as defense, the result can be a balanced package that reverses the worst of the sequestration cuts, bolsters near-term economic growth, and lowers longer-term deficits.

If, however, policymakers set the precedent that only domestic entitlement cuts can replace sequestration, they likely won’t be able to agree on replacing sequestration in subsequent years or will ultimately replace it with hefty cuts in basic assistance and social insurance programs that worsen poverty and hardship.

Click here for the full report.