Negotiations aimed at a last-ditch budget deal were at a standoff over the weekend, in part because of attempts by Democrats to address the $109 billion in automatic spending cuts slated to take effect in the current fiscal year.
Democrats tried to use new tax revenue to postpone the sequester, but Republicans rebuffed their offer, saying it would do nothing to reduce the deficit. Republicans initially proposed moving to a new measure of inflation — known as chained consumer price index — to raise money that could be used to offset the budget cuts. But they backed off after Democrats refused to consider the shift, which would effectively cut Social Security benefits in future years, in the current fiscal talks.
“We’re going back and forth on the sequester, there’s no question about that,” Sen. Richard J. Durbin, D-Ill., said.
“There’s an attempt by the other side to cause the sequester to be dealt with,” Sen. Bob Corker, R-Tenn., said.
Republicans said they had come around to the notion that tax rates would rise for high-income earners. But they were adamant that revenue should be used to pay down the deficit and bristled at Democratic suggestions that it be used to offset the sequester, which would cut virtually all government accounts across the board.
“What we want to see happen, if there’s going to be revenues involved, those revenues are applied to paying down the debt,” said Sen. John Thune, R-S.D. “What they’re insisting on is that new tax revenues be used to pay for new spending and that’s something Republicans are not going to accept.”
“If they want to do away with the sequester cuts, then figure out another way to pay for it,” he said. “One of the ways we suggested was chained CPI, but evidently that was something they say is a nonstarter. If it is, give us another proposal.”
By the time senators broke for the night on Sunday, the future of the spending cuts was still unresolved.
Leaving the automatic spending cuts to be dealt with next year could undermine prospects that a fiscal cliff agreement would spur the country’s fledgling economic recovery, even if an extension of some expiring tax rates calms jittery financial markets and eases taxpayer concerns.
According to the Bipartisan Policy Center, implementation of the sequester would reduce the nation’s economic growth in 2013 by half a percentage point and cost the economy roughly a million jobs primarily because federal contractors are expected to shed private workers.
Economists have projected the economy would pick up speed next year following a five-year slump. Without the spending cuts, the Federal Reserve estimates the economy will grow between 2.3 percent and 3 percent next year, while the unemployment rate will continue to fall to between 7.4 percent and 7.7 percent.
Already, the housing market is showing signs of a rebound, with prices in 20 cities rising 4.3 percent over a year ago, according to the S&P Case-Schiller home price index. New home sales rose to their highest level since April 2010, according to Census Bureau figures. And while consumer confidence has been depressed because of fiscal fears, many respondents to the Conference Board’s surveys say they are hopeful that the job market is improving.
Such confidence could be undone if the spending cuts are allowed to take effect and drag down the economy. The spending cuts would only delay by two years the point at which the nation’s debt would equal the size of the nation’s entire economy, according to the bipartisan center.
Sequestration was never intended to go into effect. Enacted as part of a deal to raise the nation’s borrowing authority in 2011 (PL 112-25), the cuts to domestic discretionary and military spending were intended to be so devastating as to prompt lawmakers to reach an agreement to avoid them. Were they to take effect, they would reduce discretionary spending by $1.2 trillion over 10 years, split between defense and nondefense accounts. That represents a 9.4 percent reduction for defense spending and an 8.2 percent decrease for other spending, according to the Office of Management and Budget.
Now, with Congress consumed over the question of extending expiring income tax rates, the sequester has been overshadowed. But some Republicans say they will not agree to any deal that does not curb spending.
“We still have a huge deficit,” Rep. Darrell Issa, R-Calif., said on CNN’s “State of the Union” with Candy Crowley on Sunday. “If we do not take on spending, then the cliff may not seem like a cliff but will be a downward slide to make us like Greece, no longer a viable economic power.”
Lawmakers could still turn their attention to amending or undoing the sequester early next year when Congress is likely to have to tackle an increase in the government’s borrowing authority, something expected to be needed by February. Legislation regarding the sequester could be attached to a debt limit bill.
But Speaker John A. Boehner, R-Ohio, says he will oppose doing away with the sequester unless Congress comes up with equivalent level of spending reductions. Either way, House Republicans are expected to insist on the spending cuts.
In May, the House passed a bill (HR 5652) that would replace the sequester with a series of cuts affecting only nondefense programs as well as mandatory programs.
Advocates have been mobilizing to fend off such spending cuts. The Committee for Education Funding sent a letter Saturday to members of Congress asking them to spare schools from the $4.8 billion in cuts under the sequester. Such reductions would slash funding to high-poverty schools, Head Start programs, after-school grants and programs for students with disabilities or those learning English, the committee said.
“At a minimum, we urge you to delay the sequester for one year, while a broader balanced budget deficit reduction plan is worked on by the next Congress,” the letter said.
Marion C. Blakey, president of the Aerospace Industries Association, also condemned lawmakers for leaving the sequester out of the negotiations.
“We know congressional leaders know the consequences of sequestration,” she said. “It would be a grave dereliction of duty to drop fixing it from a fiscal cliff bill. We can’t believe they would fail our military and our economy like that.”
The Office of Management and Budget has yet to determine where the cuts would come from and how many federal employees would be affected. A recent memo to agencies said the cuts could lead to furloughs or job losses, although it’s unclear how many.
While the government has enough money to fully fund salaries for a little while, cuts could come soon unless Congress amends or undoes the sequester, federal union leaders say.