The Importance of the Sequester

Nov 21, 2011

When Congress raised the debt ceiling in last August’s Budget Control Act (BCA), it mandated at least $1.2 trillion in further savings by 2021, from either Plan A, the bipartisan Super Committee, or Plan B, automatic cuts in spending -- also known as a sequester. The sequester would have automatically been turned off if a plan from the Super Committee to save at least $1.2 trillion were enacted.

However, with a Super Committee failure expected to be official very shortly, it is important that Congress leave Plan B in place rather than overriding it for three main reasons:

  1. To reassure markets that at least some savings will be put in place;
  2. To keep both sides of the aisle at the negotiating table;
  3. To create confidence that lawmakers stick to what they agree on.

Of course, relying on the sequester for savings is not at all ideal policy, but it can help force lawmakers to act. We need to enact smart reforms that improve economic incentives to work, save, and invest. We elaborated on this two weeks ago after some lawmakers suggested turning off or weakening the sequester. But what would be much better than just keeping the current sequester in place would be for Congress to quickly enact a Go Big comprehensive fiscal plan or, assuming that's too much to ask in the next month, strengthen the current sequester -- either through additional automatic savings or debt caps as proposed by the Peterson-Pew Commission -- to help put a fiscal plan in place.

To recap, the sequester would enact about $1.2 trillion in automatic spending cuts from defense and non-defense programs alike, but with some notable exemptions for low-income programs, Social Security, and Medicare cuts only up to 2 percent. CBO has estimated that the sequester would reduce defense spending by about $450 billion over ten years, non-defense discretionary spending by about $300 billion, mandatory spending by about $170 billion, and interest payments by about $170 billion.

First, our fiscal problems are so serious that Congress needs to reassure credit markets and investors that it has a mechanism in place to begin dealing with our debt path. Setting debt on a clear, downward path will require well over $1.2 trillion in savings, but calling for a certain level of savings backed up with a trigger can help lawmakers move in the right direction. As recent statements from credit rating agencies have made clear, their current worrisome outlooks are based on Congress maintaining the sequester. Weakening or overturning the sequester would worsen those outlooks.

 

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Second, and most importantly, the threat of automatic spending cuts to areas of the budget that neither side particularly wants to see can keep both parties at the negotiating table – namely, Republicans’ aversion to defense cuts and Democrats’ aversion to domestic spending cuts. Keeping both sides at the table is critical for lawmakers to Go Big and propose $3 to $4 trillion in new savings.

Lastly, as we’ve stated before, Congress keeping its word and even partial resolve is important for maintaining and even improving confidence in credit markets, among various investors, and by job-creating businesses. Debt reduction involves difficult but very necessary decisions, and it also requires sticking to those decisions.

The BCA sequester brings bipartisan discomfort and is a valuable instrument for forcing bipartisan negotiations for putting in place smart reforms now, well in advance of a debt crisis, in order to avoid paralyzing debt levels and the risk of having to make rapid reforms down the road.

As Erskine Bowles testified earlier this month, "The only thing worse than the committee failing to agree on savings would be if Congress followed that by voting to turn off the sequester." Congress must not abdicate its own sequester mechanism, and it must plunge forward in tackling the nation’s long-term debt problem.