Although the recent government shutdown raised fresh concerns about Congress’s ability to solve problems, another fiscal event earlier in the year, sequestration, has far more significant long-term consequences for America’s fiscal policy. Given that sequestration requires over $1.2 trillion in budget cuts, significant reductions in spending are already having effects in areas like national security, military operations, drug enforcement, national parks, health, education, and Medicare.
Sequestration also functions as a surprisingly useful case study in preventing future government shutdowns. Elsewhere, I’ve written about the possibility of employing automatic continuing appropriations, or default budgets, to prevent government shutdowns. In short, where a legislature and executive cannot agree to a new budget for fiscal appropriations before a deadline, some version of the prior year’s budget would be automatically implemented until a new budget could be negotiated.
While a formal version of this policy does not yet exist at the federal level, Congress’s implementation of the sequester functioned much like the budget defaults policy my coauthor and I have proposed, and thus offers several useful lessons in default budget mechanisms.
What is Sequestration?
Beginning with the Balanced Budget and Emergency Deficit Control Act of 1985 (often known as the Gramm-Rudman-Hollings Act for the bill’s principal sponsors), the federal government has frequently utilized a budget default policy that takes effect when Congress’s annual budget appropriations exceed certain pre-defined caps. Under Gramm-Rudman-Hollings, when the annual budget has overshot these limits, across-the-board cuts are made to all discretionary spending categories in equal percentages.
More recently, the Budget Control Act of 2011 mandated $1.2 trillion in budget cuts across many areas of federal spending should a specially established Joint Select Committee on Deficit Reduction prove unable to agree on the $1.2 trillion in cuts in the areas of their choosing. The committee failed, of course, and thus sequestration went into effect in early 2013, with blunt, broad-based cuts designed to reach the $1.2 trillion target in spending reductions over the next eight years.
How Sequestration Functions as a Default Budgets Policy
Sequestration automatically took effect when Congress did not act as required by law. In this sense, sequestration is a default policy. Its function was a self-imposed disciplining mechanism to incentivize Congress to reach an agreement on reductions in federal spending. By establishing a default, Congress could negotiate from a new baseline knowing with certainty what negotiation failure would bring.
And much like the recent federal government shutdown, Congress’s inability to negotiate led to the default policy going into effect. While many have argued across-the-board sequestration is bad fiscal policy, it’s certainly preferable to the shutdown of the government altogether.
What Does Sequestration Teach Us about Budget Defaults?
With sequestration having been in effect for the better part of a year and no immediately foreseeable congressional action to change it, it appears this blunt policy is a default we’re stuck with.
One takeaway might be that default policies may be less temporary than we expect, given the dysfunctional nature of today’s Congress. As sequestration has shown, even a default budget highly undesirable to both parties was not a sufficient stick to motivate Congress to reach an agreement over a new budget. One might be concerned, then, that a default budgets policy would lead to a federal fiscal policy on autopilot, unresponsive to the country’s immediate policy and spending needs.
Yet there are several reasons for greater optimism. First, sequestration was a one-off, negotiated default to achieve a goal Congress had already agreed upon, at least in principle: reducing the federal deficit by making significant and uncomfortable cuts in annual federal spending. Whereas a true default budgets policy would serve as a temporary stopgap, the Budget Control Act of 2011 mandated $1.2 trillion in permanent cuts, made either by Joint Select Committee on Deficit Reduction or by default action under sequestration.
Second, even in this era of dysfunction, members of Congress want¬—and need—to take credit for action. Congressional Republicans fulfilled their pledge to their more conservative constituents to enact significant budget cuts, while Congressional Democrats pleased liberals by warding off deep cuts to social welfare programs and including defense spending among the targets of sequestration. Under a true default budgets policy, the automatic implementation of the prior year’s budget would deny lawmakers the ability to claim any measure of victory.
Instead, I would argue that the major takeaway from sequestration is that Congress can (and should) use defaults more frequently in setting fiscal policy. Had sequestration not been enacted, it’s likely that the joint committee would have failed anyway and the implementation of unspecified budget cuts approved by Congress would have been delayed or abandoned. However unpopular sequestration may be, it effectively achieved Congress’s goals when Congress itself failed to act. In similar fashion, a true default budgets policy would provide similar stability and certainty to the annual budget-making process.