Despite Delay, Budget Cuts Still Looming

 Lloyd McCoy Jr., Consultant

On January 1, Congress passed the American Taxpayer Relief Act of 2012 which resolved the impasse over tax cuts and postponed sequestration until early March. Congress, however, did not raise the debt ceiling. As a result, the U.S. had reached its borrowing limit of $16.4 trillion dollars the last day of 2012, prompting the Treasury Department to take “extraordinary measures” to cover continued borrowing.  These measures are expected to only cover approximately two months of borrowing making it likely that debates over the debt ceiling and sequestration will converge at roughly the same time. While the postponement wards off cuts of 8-10% that sequestration would have imposed on January 2, any sigh of relief by industry should be temporary as government spending reductions are expected to play a prominent role in the debate over raising the debt ceiling.

While many of the demands voiced by members of Congress so far specifically focus on entitlement programs, government spending for both defense and civilian agencies will certainly be part of the debate. Furthermore, many members of Congress who reluctantly voted for the tax increases will deem it politically expedient to save face by securing spending cut concessions. After all, sequestration came about as a compromise for allowing the debt ceiling raise in 2011.

That’s the bad news. The good news is that the delay does give Congress more time to find an alternative means of creating efficiencies than sequestration. The President and both parties in Congress want to avoid sequestration as it is structured, hence the delay. Entitlement programs such as Medicare and Medicaid will likely take a hit in any compromise on government spending, alleviating the burden on federal agency budgets. Ultimately, expect cuts to civilian and defense budgets, in addition to the reductions already scheduled, which will still be a better alternative to the blunt tool that sequestration represented.