Sequester Replacement Must be Fiscally Responsible

Recent reports have suggested the new budget conference committee may focus its attention of a deal to replace sequestration. A recent paper from the Center for American Progress suggests a set of principles that any sequester replacement should meet; yet that set, unfortunately, ignores the importance of maintaining fiscal responsibility and fixing our long-term debt.

The four principles CAP outlines are:

• Keep it manageable: Replace the sequester for three years.
• We have already paid for 60 percent of the sequester in the fiscal cliff deal, so we should only offset 40 percent of any repeal costs.
• Balance is a necessary component: Savings should consist of revenue increases as well as spending cuts.
• Focus on the economy: Include further short-term jobs measures in addition to sequester repeal.

We do agree that fixing the debt will require deficit reduction from both tax and entitlement reform and that economic growth should be a central concern in any fiscal deal. However, we worry CAP's proposal to replace only three years of sequester will fall short of what is needed, and their proposal to offset only 40 percent of the costs threatens fiscal responsibility and credibility.

While a three-year replacement of sequester could help the short-term economy and modestly improve the long-term fiscal picture, it would unnecessarily leave the threat of sequester in place, would be too small to put our debt on a downward path, and would make sequester replacement that much harder next time.

More troubling is CAP's proposal to offset only 40 percent of sequetration. As we've explained before there is no basis to count the revenue from the fiscal cliff deal (which was a revenue loss compared to current law) against the sequetration:

[T]here were no serious offers during the Super Committee which would have turn off most of sequestration and extend most of the tax cuts without a much larger deal. Indeed, had the Super Committee agreed to pass $4 trillion in tax cuts and $800 billion of sequester reductions for only $800 billion of revenue, such a deal would have been incredibly irresponsible.

While the CAP paper argues we've already accomplished some of the Super Committee's goal, in many ways the opposite is true. As it turns out, the sequester only contains two-thirds of the savings in the original Super Committee target. A return to the Super Committee's goal would therefore mean offsetting 150 percent of the costs of sequester, not 40 percent.

CAPs sequester principles, unfortunately, do not pass the basic test of fiscal responsibility. Policymakers should adopt an alternative set of principles which more closely match the following:

• At Minimum, Don't Worsen the Deficit: Lawmakers should put in place a plan large enough to put the debt on a clear downward path; but at absolute minimum they must abide by Pay-As-You-Go (PAYGO) principles to replace every dollar of sequester relief with a dollar or more of gimmick-free deficit reduction.
• Replace Mindless Cuts with Smart Reforms: We've extensively explained the problems with the mindless, abrupt, across-the-board spending cuts. Replacing them with gradual, targeted, and pro-growth deficit reduction measures could be a win-win both in the short and long term.
• Replace Temporary Savings with Permanent Deficit Reduction: Sequestration expires after 2021 and would technically produce no long-term savings, even though our greatest fiscal problems are long-term. Policymakers should replace these temporary cuts with permanent savings -- particularly with provisions that grow over time or address growing health costs and the aging of the population.
• Aim for a Permanent Sequester Solution: Rather than dealing with sequestration one year at a time, policymakers should agree to a sustainable set of caps on a longer-term basis, accompanied by long-term deficit reduction to replace sequester.

Few would argue that sequestration is good policy or that it truly restrains long term debt growth. Yet repealing it without replacing it would both worsen our fiscal situation and send a message that our policymakers cannot credibly keep to their fiscal committments.

Sequestration should be replaced, but only if done so in a fiscally responsible manner.