$85 Billion in Automatic Cuts? Don’t Believe It
Policy + Politics

$85 Billion in Automatic Cuts? Don’t Believe It


For all the handwringing by politicians, federal workers and the defense industry over sequestration, the looming across- the- board spending cuts will be a lot smaller this year than the $85 billion frequently cited by lawmakers and the Obama administration.

Technically, you should halve that figure to accurately reflect the way federal budget bean counters compute spending increases and cuts in any given fiscal year.

The dreaded sequester stems from the 2011 eleventh-hour deal between President Obama and Congress to raise the debt ceiling and impose some immediate spending cuts, while guaranteeing $1.2 trillion of long-term deficit reduction. The first installment of those long term savings originally totaled $105 billion and were scheduled to take effect beginning January 2. But Congress and the White House scaled them back to $85 billion and delayed their implementation until March 1 as part of the New Year’s Day agreement to avert a fiscal cliff. The cuts are to be equally divided between defense spending and domestic programs other than Medicare, Medicaid and most other entitlement programs.

But while politicians keep talking about $85 billion in spending cuts this year, in fact those cuts are to be made to “budget authority,” not actual budget “outlays” or spending. In federal accounting jargon, budget authority is how much money Congress allows an agency to commit to spending in the future, while outlays are how much money actually flows out of the agency in a given fiscal year.

The two figures can be very different. G. William Hoagland, a federal budget expert with the Bipartisan Policy Center, notes that the government “spend-out rate” is much slower on the defense side than for domestic programs. For instance, a $42 billion cut in defense budget authority this year probably translates to a reduction of $30 billion or so in outlays, while a $42 billion cut in domestic programs probably would result in $35 billion or so decrease in actual spending this year.

Another way of looking at it is that federal agencies can draw from stockpiles of unused funds from past years. “This excess budget authority rolls over from year to year,” wrote Bank of America Merrill Lynch economists Ethan Harris and Joshua Dennerlein in a client note. “These programs can use this excess budget authority to count towards their sequester requirements.”

Actual spending cuts would be about $42 billion for the seven months left in this fiscal year, or  $72 billion on an annualized basis, according to Bank of America.

But there are other reasons why sequestration will deliver far less in deficit reduction than many assume. Scott Lilly, a former House Appropriations Committee chief of staff and now a fellow with the liberal Center for American Progress, notes that user fees fund many of the functions of the government that are subject to the sequestration: “To the extent that sequestration reduces the ability of government to perform these functions, these fees will not be collected.”

Take, for instance, air traffic control, Lilly wrote this week:

The government spends a little more than $15 billion a year maintaining and operating the air-transportation system. Most of that money comes from user fees charged to airline passengers for air cargo and aviation fuel. If you buy a ticket to fly to Orlando, for example, you pay $3.90 to the Airport and Airway Trust Fund as part of the tax included in the price of your ticket. Last year the trust fund generated a little more than $11 billion—covering nearly 70 percent of the total expenses of the Federal Aviation Administration, or FAA.

Under sequestration, the FAA budget would be cut by more than $500 million over the rest of this fiscal year – enough to result in furloughs of a majority of the agency’s 47,000 employees for one day per pay period for the rest of the year, the controller of the Office of Management and Budget said at a Senate hearing last week. Those furloughs could set off a ripple effect, ultimately resulting in fewer flights and fewer user fees collected by the Airport and Airway Trust Fund. The loss of those payments will offset much of the savings from the sequester.

The same dynamic could play out at other agencies as well, Lilly wrote:

User fees are collected to offset at least a portion of the spending of dozens of government agencies, such as the Patent and Trademark Office, the Securities and Exchange Commission, the Food Safety Inspection Service, the U.S. Judiciary, the Food and Drug Administration, the State Department, and the National Park Service. Some agencies—such as the Patent and Trademark Office— generate more revenue  than they spend. If agencies keep part of their workforce at home each day, the deficit will not be reduced. In fact, it will increase.

“There is a right way and a wrong way to cut federal spending, but the sequestration plan about to go into effect is perhaps the most boneheaded approach that could possibly be concocted,” Lilly said. “The sequester won’t reduce the deficit by anything close to the $85 billion that’s being advertised. What’s more, it may not reduce the deficit at all.”