Fiscal Cliff & Sequestration

Backgrounder … What is this & why do or should I care?

Fiscal cliff – the effect of a series of enacted legislation which, if unchanged, will result in tax increases, spending cuts, and a corresponding reduction in the budget deficit. These laws include tax increases due to the expiration of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and the spending reductions (“sequestration”) under the Budget Control Act of 2011.

Sequestration – the act of removing, separating, or seizing anything from the possession of its owner under process of law for the benefit of creditors or the state.

What is the 2013 Fiscal Cliff & Sequestration?

On January 1st, 2013, due to lack of bipartisan agreement  by Congress mandatory tax increases and spending cuts will automatically go into effect.

Sequestration is part of the mandatory requirement of the Budget Control Act of 2011, which was driven by the Republicans’ insistence on spending cuts as their condition for agreeing to raise the debt-ceiling limit in 2011.

How will the Fiscal Cliff & Sequestration affect me … and the NIH?

The tax increase will affect every nearly American in one way or another. There is considerable debate as to if the benefits of the cuts and these ensuing increases disproportionately impact the rich.

Over a trillion dollars of cuts over 10 years are mandated. The Fiscal Cliff January 1st 2013 spending cuts are estimated at 10% for non-war military spending and 8% for all other discretionary government spending, which includes the NIH.

The NIH had $31 billion in President Obama’s 2013 budget proposal – the entire budget was unanimously rejected by both houses of Congress this past spring.

A more financially focused article on the Fiscal Cliff can be read here.

What should we do?

The easy answer is for each of us to lobby that our favorite program not be cut and that all cuts instead be directed elsewhere.  Or we could “kick the can” down the road, maintain the status quo with our deficit spending and hope the can isn’t too big when we have to kick it again in a few more months.

Should we lobby Congress to keep NIH funding intact and cut elsewhere? Let me digress for a moment …

I’m a MLD dad. I’ve lost one daughter to MLD and have another who is terminal with the disease.  It sucks.  More money might accelerate the research towards a viable MLD therapy. There are over 7,000 rare diseases. 1 in 10 Americans have a rare disease.  Everyone wants a therapy for their disease – no one disease is any more or less deserving than MLD.

But I’m also a fiscal conservative and know that somehow we have to pay for what we spend and we can’t spend all of our credit right now and have none left for the future.  We must be prudent and reasonable about what we spend and how we spend it.

So no, I do not think maintaining the NIH budget and pushing the problem to other budget line items is viable.  And I do not think focusing on FY2013 budgets without addressing the bigger issue is anything but kicking the can down the road where it will only get so big that soon we will not be able to kick it at all! We must deal with the core budget (income/spending) deficit and national debt issues.

So I believe the answer is actually much more complicated.  I’ll elaborate in my next blog post which will include several ways you can get involved and take action.

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More Background:

These are all part of the same problem … fiscal irresponsibility by Congress and the citizens who enable them to spend like they do.

Massive Federal Debt

  • Our current federal debt crossed over 16 trillion dollars in September 2012.
  • The US government is borrowing 33 cents of every dollar it spends.
  • Each citizen’s share of this debt is $51,800.
  • The National Debt has increased and average of $3.88 billion per day for the last 5 years!
  • Interest payments on the national debt are now more than $200 billion per year.

No Federal Budget

  • We have not had a federal budget since April 29, 2009, rather the divided House & Senate have used Continuing Resolutions to keep the government operating.
    • On 2/13/2012 President Obama submitted his 2013 budget to Congress.
      • This proposal never had an annual deficit of less than $748 billion, would double the national debt in 10 years, and would see annual interest payments approach $1 trillion per year.
    • The Republican controlled House voted it down 414-0 in March
    • The Democrat controlled Senate voted it down 97-0 in May
    • How is the Budget Supposed to Be Put Togetherclick here
  • In September, the House passed a Continuing Resolution (CR) budget appropriation covering the first six months of FY2013 (October 2012 – March 2013) by a vote of 329-91.

How Washington Spends Our Money

  • In FY2011, Washington spent $3.6 trillion.
  • The last time the budget was balanced was ten years ago in 2001, when Washington spent $1.8 trillion ($2.1 trillion when you adjust for inflation).  Our current spending is 50% higher than it was back then.
  • Entitlement spending will more than double by 2050. That includes spending on Medicare, Medicaid and the Patient Protection and Affordable Care Act (PPACA or Obamacare) subsidy program, and Social Security. Total spending on federal health care programs will triple over this timeframe.
  • Taxes paid per household have risen dramatically, hitting $18,400 in 2010 (compared with $11,295 in 1965).
  • Federal spending per household is skyrocketing. Since 1965, spending per household has grown by nearly 162 percent, from $11,431 in 1965 to $29,401 in 2010. From 2010 to 2021, it is projected to rise to $35,773, a 22 percent increase.

Gamesmanship and Desperation Results in the Budget Control Act of 2011

In late August 2011, in an effort to solve the immediate debt ceiling limit problem, and as a result of Congress’ failure to reach a bi-partisan debt-reduction deal, the Budget Control Act of 2011 call for mandatory automatic tax increases and spending cuts starting January 1st, 2013 resulting in a $1.2 trillion in deficit reduction over 10 years.

  • The Budget Control Act calls for cuts equaling about $100 billion a year, centered mostly in the discretionary portion of the federal budget.
    • Non-discretionary programs such as Social SecurityMedicaid, food stamps, and more  – would not be affected.
    • Medicare, another broad-reaching program, could see spending cuts of 2 percent under the law.
  • The challenge is that discretionary spending is a modest (18%) portion of the entire budget.
    • Balancing a budget that is out of whack by over a third using a slice of the pie that is only 18% is not a recipe for success.
  • An excellent article about the history of the sequester can be found here.

The Brutal Arithmetic of the Budget Deficit

  • Our spending is $3.6 trillion a year
  • $2.4 trillion comes in via taxes
    • 46 percent from individual income taxes
    • 35 percent from payroll taxes meant for Social Security and Medicare
    • 10 percent from corporate income taxes
    • 9 percent from estate and gift taxes, excise taxes, and others.
  • $1.1 trillion is borrowed … almost 1/3 of our spending is borrowed!
  • Some say we should …
    • Tax corporations more.  If we doubled their taxes that would address less than 25% of today’s deficit, not a practical plan – but this would only be a dent nonetheless.
    • Allow the Bush tax cuts to expire for earners over $250,000 … that would only address 9% of the current deficit.
    • Shut down the entire DC government … aside from the Pentagon and entitlements. Fire every one of the 2.8 million federal employees, close the buildings they work in, and eliminate the government services they provide saving $371B … even this extreme solution is less than 1/3 of the deficit.
    • Raise taxes on the middle class … frankly, this is where the real money is.
    • Address Entitlements (non-discretionary spending)  … Medicare, Medicaid, and Social Security which total $2.025 trillion (59% of our spending) … this is where the fiscal leverage is – unfortunately it’s where the lobbyists and voter blocks are as well.
    • Address military defense spending… $700B (19% of our spending)
      • About 1/3 of these expenses go directly to active and retired personnel in the form of salaries and benefits

More Perspectives

  • “While both parties are culpable for sequestration because the Budget Control Act passed Congress, the president proposed it originally and ultimately owns its outcome,” said Mackenzie Eaglen, with the conservative American Enterprise Institute. “That is because he alone can lead by calling the party leaders together for a resolution today if he wanted as president.”
  • Other see the two parties as co-owners of sequestration, especially since Republicans in Congress voted for the law that set up its possibility. In the House, 174 Republicans and 95 Democrats voted for the law, while 66 Republicans and 95 Democrats opposed it. (Final tally: Passed 269-161.) In the Senate, 28 Republicans and 45 Democrats voted for it, while 19 Republicans and 6 Democrats opposed it. (Final tally: Passed 74-26)
  • Rep. Judy Chu (D-Calif.) says “Sequestration was never intended to be good fiscal policy. It was never intended to be policy, period. When Congress passed the Budget Control Act in 2011, they formed the Joint Select Committee on Deficit Reduction, more commonly known as the Super Committee, to cut nearly a trillion dollars from the federal budget. Sequestration – a fancy word for painful cuts to every area of the 2013 budget – was a failsafe in case Super Committee negotiations broke down. The plan was simple: By passing sequestration into law, Congress was creating a deterrent against its own gridlock. The law was so unpalatable to both sides – Democrats wanting to avoid cuts to social programs, and Republicans wanting to safeguard defense spending – that theoretically, everyone would negotiate in good faith to avoid it.”
  • Scott Lilly at the liberal Center for American Progress has done his own analysis of the problem, noting that the cuts of about 8 percent would go into effect after the fiscal year is already three months old. That means agencies might really find themselves scrambling to reduce outlays by about 12 percent in the remaining nine months of the fiscal year.
  • Many finance experts say the larger lesson that emerges from the sequester law is this: America’s giant fiscal problem appears impossible to solve if two big tools – entitlement reform and tax-revenue changes – are left on the sidelines. So far, Republicans in Congress have insisted that fiscal progress be sought only through spending cuts, while Democrats have shied away from entitlement changes that might result in leaner benefits and have preferred to raise income through taxes.

References & Links

Politifact on Sequestration: http://www.politifact.com/truth-o-meter/statements/2012/oct/24/barack-obama/obama-says-congress-owns-sequestration-cuts/

CS Monitor on Sequester: http://www.csmonitor.com/USA/DC-Decoder/2012/1102/Can-we-live-with-the-budget-sequester-Yes-but-it-s-better-if-we-don-t

Republican position: http://budget.house.gov/reconciliation/

Operating Without A Budget: http://blog.heritage.org/2012/01/20/1000-days-without-a-budget-facts-on-the-senates-failure/

Bush Tax Cuts: http://en.wikipedia.org/wiki/Bush_tax_cuts

Budget Control Act of 2011: http://en.wikipedia.org/wiki/Budget_Control_Act_of_2011

CNN on the Fiscal Cliff: http://money.cnn.com/2012/11/08/news/economy/fiscal-cliff/index.html

US Fiscal Cliff: http://en.wikipedia.org/wiki/United_States_fiscal_cliff

The Federal Budget: Issues for FY2013 and Beyond  – prepared for the members of Congress: http://www.fas.org/sgp/crs/misc/R42362.pdf