Replacing the Sequester With...More Sequester? No Deal

As the budget conference committee works to develop a plan to offset some of the sequester, they may be tempted to use budget gimmicks in place of hard choices (last week we warned against use of the war gimmick). One such gimmick would be to repeal most or all of the sequester now and pay for it by increasing the sequester later.

Doing so would be an irresponsible way to offset the sequester, and it would lack credibility. From a policy standpoint, offsetting the temporary cuts of sequester now with deeper temporary cuts later would do nothing to improve the fiscal situation; the sequester was meant to be a backstop to encourage permanent deficit reduction policies.

But more troubling, repealing the sequester now by deepening the sequester in future years would lack credibility would likely be seen as a pure budget gimmick. After all, if we are unwilling to live under the sequestration cuts now, what evidence is there that we can bear even deeper cuts later?

Imagine that policymakers repealed two thirds of the discretionary sequester this year -- $60 billion -- shrinking a 8.5 percent cut (relative to pre-sequester caps) to a 2.8 percent cut, and then paid for it by reducing future caps $6.6 billion per year over the next nine years. Under that scenario, next year's cut would by 8.9 percent -- something they are unlikely to accept if they couldn't allow for a 8.5 percent cut this year.

Instead, they might repeal $66 billion of the sequester next year, paid for with $7.5 billion of annual cuts over the following nine years. And then they might repeal $82 billion the following year, and so on and so on. Taken to its logical conclusion, policymakers would face an 12.6% ($125 billion) cut in 2021 -- one which they would be quite unlikely to accept -- and in the process would have only allowed one-third of the sequestration's original cuts to actually go to deficit reduction.

The chart below illustrates the scenario described above – offsets share the same color as the sequester relief provided. As you can see, sequester relief that costs only $60 billion in 2014 will rise to $90 billion by 2018 and $130 billion by 2021. And those cuts are on top of the $30 billion in cuts that are continually retained.

Anyone who doubts that Congress will repeatedly kick the can on actually making discretionary cuts need only look at the experience of the Medicare Sustainable Growth Rate (SGR) formula in which Congress has consistently canceled cuts scheduled for the upcoming year and required deeper cuts in future years. Eventually, the cuts snowballed to the point where doctors now face a 24% cut that no one ever thinks will occur. Turning the sequester into another SGR would be a grave mistake.

To be sure, not all adjustments in discretionary cap levels would be gimmicky in nature. A much more modest plan to "smooth" the sequester cuts in concert with other reforms could help make what is left of the sequester easier to bear by phasing it in more gradually. This smoothing wouldn't solve our fundamental budget problem or make the necessary hard choices, but if realistic it could be part of a more complete budget plan.

Yet there is a slippery slope between reasonable smoothing and unreasonable gimmicks. Reducing the amount of cuts that need to be made in the appropriations bills for the upcoming fiscal year by promising to make greater savings in later years creates a dangerous precedent that could easily be abused. To be credible, smoothing must be part of a larger plan which agrees to a full set of caps which policymakers intend to and are able to abide by. Any reductions in the sequester now paid for by increases in future-year sequester cuts which will be difficult to enact or which policymakers intend to modify later would qualify as a gimmick. And any significant sequester relief not accompanied by permanent deficit reduction would likely be non-credible and certainly a missed opportunity.

Backloading sequester will not solve our fundamental budget challenges, and declaring that we cannot accept cuts now so we will impose a deeper version of those cuts later does not pass the laugh test.

Congress should take the steps necessary to replace mindless, temporary, anti-growth sequester cuts with sensible, targeted, permanent, long-term reforms. But as Congressional Budget Office Director Doug Elmendorf explained today, "no steps at all are better than steps backwards." Congress must not gimmick it's way to sequester relief.