The Sequester and the Baseline

Since the President's budget was released last week, there has been an ongoing debate over how much it saves. We’ve tried to shed light on this question by showing the President’s offer and budget from five different baselines, but in some ways that has raised as many questions as answers.

While there are many differences between the various baselines, among the most controversial questions is whether to count the repeal of the sequester as a cost, or to assume it will occur and measure savings relative to that. This was the topic of a heated discussion between acting OMB Director Jeff Zients and Budget Committee Ranking Member Jeff Sessions last week. While Zients argued the offer saved over $1.8 trillion, Senate Republicans have argued that when you subtract the sequester that number falls to $600 billion, and when you make further adjustments the budget achieves virtually no deficit reduction

This debate illustrates the fact that constructing a current policy baseline is more art than science. The point of such a baseline is to incorporate policies that lawmakers are likely or have shown to be likely to enact, even if they are not what is currently scheduled in law. Most of the policies are expiring ones that have frequently been extended, like the "doc fix," while sometimes there are other policies which are about to take place that we expect not to, like the sequester. The use of intent to determine what is in the baseline can lead to many different interpretations.

Many people have asked where CRFB stands on this issue and whether we believe the sequestration should be included within the current policy baseline or not. Indeed, our organization and our baseline were both invoked in the Zients-Sessions back and forth. In defense of the Administration's position on the sequester, Zients invoked CRFB president Maya MacGuineas, arguing that she "does not have the sequestration in her baseline."

Our current CRFB Realistic baseline does include the sequester repeal as one of the current policy adjustments. This largely reflects the situation as it stood in February, when the CBO baseline came out and when we constructed our baseline. The sequester had not yet taken effect, and just a month ago, the American Taxpayer Relief Act had been enacted, which delayed sequester implementation for two months. Although there had not yet been an effort to have a longer-term delay or outright repeal, both parties had expressed their intent to replace the sequester at least for 2013, if not longer, and had done so in past budget plans. Given all these facts, we determined that sequester repeal was appropriate to put in the Realistic baseline.

Since then, the situation has changed to make this decision less clear. The sequester has now been in effect for a month and a half, and there has not yet been a concerted bipartisan effort to replace it. That could very well come in negotiations over the budget resolution or the debt ceiling, but as of yet there has been little action. These are solid arguments for no longer having the repeal of the sequester be part of current policy.

But there is also a case for still having it as current policy. While the sequester has "happened," it was never actually supposed to go off; rather it was meant to be an incentive to enact a comprehensive deficit reduction plan – and it still can be one. In addition, the majority of the brunt has not been felt yet even for 2013 alone. When the effects become much more tangible, political pressure could increase for some sort of replacement package. Furthermore, neither political party actually supports the full sequester as it’s currently designed, potentially increasing the chances the sequester could be repealed or replaced. In fact, neither budget passed by the House or Senate would maintain the sequester in its current form – with the House moving the defense savings over to non-defense programs and the Senate also repealing it outright. The fact that there has not been a major "fiscal speed bump" since the sequester hit has meant that there may not be a strong impetus to do so until the next speed bump comes up.

How we treat the sequester the next time we update our current policy baseline will depend on what happens in the interim. Our next update to the baseline will likely coincide with the CBO's next update of their baseline, possibly in August or sometime sooner if they release a new baseline along with their analysis of the President's budget. The events that take place between then and now -- whether there is a substantive negotiation process involving the sequester -- and whether policymakers view the sequester as credible deficit reduction policy or not. For now, that question is uncertain.

Regardless of the budgetary treatment of the sequester, it is clear that even an equal-sized deficit reduction plan over ten years would be preferable to the sequester for a number of reasons. For one, as we have mentioned many times before, the sequester is quite front-loaded which means it could cause substantial damage to the short-term economy while doing very little to reduce the deficit in later years. The sequester also fails to deal with the structural drivers of the deficit -- entitlement costs -- and it ends in 2021 and so achieves virtually no savings over the long run.

Furthermore, the more important measure of a budget is not its savings but where the budget ends up. Debt and deficits as a percent of GDP tell us much more than savings since baselines can be manipulated or interpreted to include different policies; by contrast, there is little room for manipulation in the budget metrics just mentioned. The good measure of a budget is not whether it saves $700 billion or $1.8 trillion. It is whether it makes debt and deficits sustainable over the longer term.