The Math Behind the Automatic Budget Cuts

Niraj Chokshi

Why Are We Here?

Under a deal to raise the legal limit on the government's borrowing in August 2011, lawmakers agreed to roughly $1 trillion in spending cuts over the next decade and set up a process to find at least $1.2 trillion in further savings. That legislation, the Budget Control Act, included the creation of a "supercommittee" to try to hammer out an agreement on long-term budget savings. The committee folded in late 2011 without an agreement on deficit reduction, setting the stage for automatic cuts to mostly discretionary programs totaling $1.2 trillion to kick in starting in 2013. The cuts, known as sequestration, apply to both domestic programs and defense spending.

Was It a Manufactured Problem?

The budget talks in 2011 were aimed at finding a long-term solution to curbing the spiraling federal debt, but a compromise on a budget "grand bargain" has proven elusive so far. One way to measure a nation's fiscal health is to focus in on the relationship between how much money the government owes and the value of the goods and services its economy produces in a given year—otherwise known as the debt-to-GDP ratio. Economists are divided over what consitutes a dangerous debt-to-GDP ratio, with some economists pegging it at 60 percent and others putting it closer to 90 percent. The nonpartisan Congressional Budget Office last month said it expects debt to reach 76 percent of GDP by year's end—its highest level since 1950. The ratio is expected to remain roughly at that level over the next decade, but then it is expected to begin ballooning, as the Treasury Department chart below shows.

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Got It, Debt is Growing. But Does Sequestration Address It?

Well, not really. The problem is sequestration exempts one of the key drivers of the debt: entitlement spending. As this chart from the Bipartisan Policy Center shows, health care spending is one of the biggest sources of pressure on the federal budget. “Simply put,” they write, “there can be no lasting solution to the U.S. debt crisis without structural changes in the Medicare program to slow its cost growth.” The government spent about $3.5 trillion last fiscal year—meaning sequestration amounts to a roughly 2.4 percent cut to total federal spending. Additionally, current deficits aren't as much of a concern as higher future deficits, some economists argue. 

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Sequestration Affects a Small Slice of Spending. So Is It That Bad?

Under sequestration, government spending is slated to be cut by $85 billion this fiscal year, with the reductions divided evenly between defense and domestic programs. (The Bipartisan Policy Center has an easy-to-understand chart laying out how the cuts are distributed over the ten-year course of sequestration.)

If nothing is done, the economy could lose 750,000 jobs in 2013, with the economy growing by about half a percentage point less than it would have otherwise, according to the CBO. Roughly 800,000 Defense Department civilian employees could be furloughed for up to 22 days. But lawmakers are expected to cancel some of the cuts later in the year to avoid a strong public backlash.

The cuts were supposed to start sooner and be larger, but they were decreased and delayed by three months thanks to the fiscal cliff deal hammered out at the start of the year. That delay, however, means steeper reductions since the savings will have to be achieved within a shorter time frame. Social Security, Medicaid and veterans’ benefits, for example, are among the programs spared by sequestration.But doctors, hospitals and other providers under Medicare will see their payments this year trimmed by 2 percent.

The cuts under sequestration can be divided in a handful of ways, but the vast, vast majority—more than 95 percent—affect just four types of government spending. They are:

1. Defense discretionary spending.

Defense programs whose annual budgets are set by Congress receive the largest total cut, taking a reduction of 7.8 percent, totaling $43 billion.

Here are a few examples of programs affected by these kinds of cuts:

  • Operations and maintenance of the Army National Guard: $573 million
  • Procurement of mine-resistant, ambush-protected vehicles: $47 million
  • Weapons procurement for the Navy: $307 million
  • Family housing construction for the Army: $24 million

2. Nondefense discretionary spending.

Domestic programs whose annual budgets are set by Congress will also take a big hit.  Each program is cut by 5 percent, or a total of nearly $26 billion.

Programs affected include:

  • Federal Aviation Administration: $637 million
  • Salaries and expenses for the Federal Bureau of Investigation: $552 million
  • Salaries and expenses for House staff: $62 million
  • Operation of the National Park System: $113 million
  • The Corporation for Public Broadcasting: $22 million

3. Medicare.

The 2 percent cut to spending on Medicare providers translates to just over $11 billion.

4. Nondefense mandatory spending.

Some domestic programs whose spending is automatic will take a 5.1 percentcut for a total of just over $5 billion.

These include:

  • Federal unemployment benefits and allowances: $58 million
  • The Civil Service Retirement and Disability Fund: $2 million
  • The Consumer Financial Protection Bureau: $23 million
  • The September 11th Victim Compensation Fund: $16 million