Start the conversation
Another fiscal crisis lurks just on the horizon – a combination of the mandatory spending cuts known as sequestration and the need to raise the U.S. debt ceiling – and pundits are losing sleep trying to figure out what Washington is going to do about it.
They're wasting their time.
"The odds that Congress and the White House will ink a comprehensive deficit-reduction deal appear as long as they have been in more than two years, even though both parties acknowledge it's the only way to break the cycle of fiscal cliffs," Politico observed yesterday (Tuesday).
In all likelihood, Democratic and Republican leaders will make a last-minute deal that achieves the minimum necessary to keep the government running while putting off the harder decisions until later – three months, six months or even a year.
That's what they always do, although the script may change a little.
Why Congress Will Punt On Automatic Spending Cuts
The sequestration would force immediate spending cuts of more than $100 billion ($1.2 trillion over 10 years), about half of which would hit defense. It would reduce this year's gross domestic product (GDP) by as much as 1%.
Any deal that emerges from this mess will almost certainly include an increase to the debt ceiling, as it's the one thing that can't realistically be put off, and few in Washington are truly willing to risk further harm to the U.S. credit rating.
But there are several reasons not only why the sequestration issue can be delayed, but why lawmakers will see advantages in doing so.
First of all, sequestration itself – mandatory federal spending cuts – is a creation of Congress.
That means, in theory anyway, that Congress can modify the terms of sequestration as lawmakers see fit.
If sequestration were truly binding, the cuts would have taken effect on Jan. 1, as scheduled.
Next, there's a marked lack of enthusiasm among most lawmakers to cut specific things in the budget. Most will say they want "spending cuts," but become elusive when asked exactly what they would ax.
Sequestration would bite many programs held dear by many members of Congress; delaying such cuts in the hope of finding a way to reduce the bite later will have a strong appeal.
And a quirk in the sequestration law itself will serve to encourage this thinking.
A recent research note from Goldman Sachs Group Inc. (NYSE: GS) points out that the sequestration scheduled for Jan. 1 was an across-the-board cut – Congress could not cut more in one area to preserve money in another – but that changes in fiscal year 2014 and beyond.
Sequestration in 2014 still would reduce the amount of money lawmakers can spend, but free Congress to adjust as it sees fit as long as it stays under the cap. That wiggle room gives Congress a huge incentive to postpone sequestration until the end of 2013.
"Delaying the sequester to the start of the coming fiscal year would not simply "kick the can' on fiscal restraint but it would also allow a less disruptive and more efficient cut to be implemented," wrote Goldman analyst Alec Phillips.
In addition, politicians of all stripes can argue that they need to delay sequestration to avoid damaging the U.S. economy and possibly sending the country back into a recession.
While Washington will find some way to squeak by the March 1 deadline, the bad news is that once again little will be solved.
Until the country's elected leaders step up and address sequestration and other budget issues once and for all, America will continue to get dragged through fiscal debate after fiscal debate. President Obama said as much Monday in his press conference.
"We've got to break the habit of negotiating through crisis over and over again," President Obama said. "Because if we continue down this path, then there's really no stopping the principle."
Related Articles and News:
- Money Morning:
Why the Spending Cuts Battle Looks Uglier Than Fiscal Cliff Fight
- Money Morning:
Why the U.S. Debt Ceiling Debate is a Bigger Deal than the Fiscal Cliff
- Money Morning:
How this U.S. Debt Ceiling Tactic Could Backfire on GOP
Transcript of Jan. 14 Press Conference
Debt debate: No easy path to avoid chaos
- Business Insider:
GOLDMAN: Hide Your Kids, The Sequester Is Coming