There was short-term optimism about the U.S. economy after the fiscal cliff deal, but there's still a looming problem for this year that can't be avoided: automatic spending cuts to government programs.
Because Congress did not reach an agreement on them, the automatic spending cuts – known as sequestration – are now delayed until March. Lawmakers will meet in March to try and restructure the cuts.
As of now, the cuts equal $1.2 trillion in savings over 10 years. If nothing is done, there will be across-the-board preprogrammed reductions in a number of government programs, with the defense industry being hit the hardest with $55 billion.
For lawmakers wielding the knife, deciding where to slash budgets is tricky. If there are too many reduction-related layoffs, the automatic cuts could kick the nation back to a recession.
Here's a breakdown of what will be cut if Washington does nothing and lets the sequester go through as planned.
What are the Automatic Spending Cuts?
Automatic Defense spending cuts for 2013:
- This could include operational spending for the Afghanistan war as well as domestic spending cuts for training, readiness and U.S. bases. This also encompasses layoffs and furloughs for civilian defense workers, reaching more than 100,000 this year.
- Readiness could be cut 20% and the U.S. Army could undergo a 30% slash.
- The Department of Defense budget could be cut by an estimated 11% annually.
- Affected programs may include research and development and the number of awarded government contracts.
Automatic Non-defense spending cuts:
- The Department of Education faces an automatic across-the-board cut from 7.8% this year down to 5.5% in 2021.
- The Department of Agriculture is next up with some government subsidies to farmers and other agricultural programs facing cuts.
- Farm support programs are in the top spot for the remaining mandatory spending cuts.
- Other areas facing potential cuts include a 7.6% spending reduction in entitlement programs (such as food stamps) but its benefits would not be cut. Cutbacks to Medicare providers would include a 2% reduction in payments to nurses, doctors and insurance plans.
- Additional non-defense cuts are still being determined. The program cuts and amounts could change as lawmakers talk, but the goal of $1.2 trillion in cuts has to be reached.
These programs aren't involved in the automatic spending cuts:
- Social Security, Medicaid, Supplemental Security Income, and Temporary Assistance for Needy Families. A planned Medicare payment cut of 27% to doctors has been postponed.
- Pell grants (student loans), spending from many transportation trust funds (includes highways, mass transit, and airports), and programs overseen by the Department of Veterans Affairs.
- Here's an interesting one: the compensation for the current president along with former presidents' pensions. Congress is also included as payments to its widows and heirs from deceased members are not affected.
- While the majority of Medicare payments to providers are subject to cuts, it is limited to a 2% percent decrease.
- There's a long of other agencies and entities that are exempt from cuts. This includes the little known Internal Revenue Collections for Puerto Rico, Payment to Military Retirement Fundand District of Columbia Federal Pension Fund–just to name a few.
Related Articles and News:
- Money Morning:
U.S. Debt Ceiling: Government "Borrows" Pension Funds to Avoid Default
Sequestration – CNBC Explains
Inside The Fiscal Cliff Budget Compromise Bill: Tax Cuts and Tax Hikes
Cornell University Law School:
2 USC § 905 – Exempt programs and activities