Government Eyeing Down Fiscal Crisis, $1.2 Trillion in Cuts

It goes back to last summer’s debate over the debt ceiling.

After months of political brinkmanship, Congress agreed to raise the debt limit, the amount of money the government can borrow to stay afloat. But deficit hawks demanded a plan to cut hundreds of billions of dollars from the federal deficit in return. And the way to do that was the super committee, a group of 12 lawmakers from the House and Senate who were charged with reducing the federal deficit by one and a half trillion dollars over a decade.

“It was basically set up to fail,” said Jason Peuquet, research director at the nonpartisan Committee for a Responsible Federal Budget.

Peuquet said Congress wrote the Budget Control Act of 2011, the law that created the super-committee, with a dangling threat: The sequester. If the super committee could not reach an agreement, federal spending would be cut across the board by $1.2 trillion.

“They acknowledge the need to come back to this. So they set the sequester to go off some 400 days in the future. Unfortunately it didn’t force them to reach a deal this past fall, but hopefully now, with the sequester much closer to going off, it can finally force lawmakers into agreeing,” Peuquet said.

Most believe the cuts will cut wide and deep. Government agencies can expect to lose between eight and ten percent of their operating budgets.

The Office of Management and Budget must release a plan for what the cuts will look like. And Jason Peuquet said the White House will up the ante – telling Congress, you created this mess, fix it.

“It’s probably going to say we’re not able to make well-informed decisions about what programs are working and which ones are not, and cut the ones where we can,” he said.  “It’s probably going to tell us all programs across the board, whether or not they’re working or failing, they’re going to be cut by the same percentage.”

And that leaves an incredible amount of uncertainty. Businesses that rely on government contracts cannot plan ahead. And states, which take federal money for all sorts of programs, are in the gray too.

State commissioners don’t know how much money to expect for their agencies.

“Well I think they have a great deal of unease because we obviously receive a lot of federal moneys in the various state programs. And for them to run their programs effectively, it’s good for them to have an idea of what’s coming down the pike,” said Kip Knudson, who runs Gov. Sean Parnell’s Washington, D.C. office.

Perhaps most important, citizens, every day people, don’t know what to expect. There are exemptions to Medicare, Social Security and military personnel. But what does it mean for college students with subsidized student loans? Or military families who rely on Tricare for medicine?

While there are uncertainties, some things are nearly guaranteed. The Congressional Budget Office warns that the combination of the cuts and tax increases would send the economy back into recession. And it’d hurl the unemployment rate back up over nine percent by the end of 2013.

The cuts may begin to corral the out of control debt and deficit. But Jason Peuquet said they won’t structurally change Social Security, the tax code and Medicare and Medicaid – the largest drivers of the deficit.

“At some point investors say enough is enough. You’re not spending or taxing in the way to balance your budget, and we don’t have confidence you’re going to repay us in the future,” he said.

And if investors lose confidence in the U.S. economy, interest rates spike, and the fiscal crisis becomes personal.

“That makes it harder to take out a loan for a new car. That makes it harder to get an affordable mortgage for a new house. Combined, that really slows down the economy,” Pequet added.

The deficit increased in part because of the last recession. The government spent more on things like unemployment insurance and food stamps.

There’s an expectation in Washington that Congress will do exactly what it did last year – push the problem further down the line.

Sen. Lisa Murkowski said Congress could change the effective date of the cuts.

“We punt, if you will, and come to an agreement that sequestration doesn’t go away, it’s just pushed back an additional six months or an additional year,” Sen. Murkowski said. “In other words, the hammer is still there, but we’ve pulled back a little bit on when that comes down.”

There is consensus that action sooner rather than later is better. It’s safer to make the cuts on our own terms instead of the demands of creditors.

But signs point to Congress holding off, especially with the election just two months away.