The deal postpones sequestration cuts that otherwise would have taken effect beginning today — a self-imposed penalty enacted by Congress if it failed to reduce the deficit by $1.2 trillion over the next decade. Under sequestration, Defense Department agencies will have their budgets cut by about 9.4 percent, and domestic agencies will see roughly 8.2 percent budget cuts. Military personnel and the Veterans Affairs Department would be exempt from the cuts.
For agencies across the government, the two-month delay means officials won’t be issuing furlough and layoff notices, nor canceling contracts just yet.
The deal extends tax cuts that would have otherwise expired for couples making less than $450,000 and individuals who earn less than $400,000 annually.
In a Dec. 31 midday address, Obama, echoing lawmakers from both parties, said he “wanted a bigger deal ... that doesn’t just deal with the taxes.”
But that larger deal simply became unreachable due to time restraints and ideological differences. And that means another big fiscal fight awaits the new Congress in January, as it will turn its attention to increasing the debt-limit ceiling.
The two-month delay to sequestration cuts will cost $22 billion, Jeff Zients, acting director of the Office of Management and Budget, said late Tuesday night in a post on his official blog. That cost will come from changes in the treatment of tax-preferred savings accounts and lower caps on discretionary spending over the next three years, according to Zients.
For fiscal 2013, the bill would entail a $4 billion cut to a cap of slightly more than $1 trillion in total discretionary spending, with another $8 billion in reductions in store for fiscal 2014.
Labor leaders said they were concerned about the budget cuts needed to pay for the sequester delay.
American Federation of Government Employees President J. David Cox said in a statement that he is urging OMB to cut contractor compensation before furloughing federal workers or cutting critical programs.
William Dougan, president of the National Federation of Federal Employees, said the bill is “a bad deal.”
“The most important federal workforce issue of our generation — sequestration — continues to hang over the head of federal employees throughout government,” Dougan said in a statement.
Colleen Kelley, president of the National Treasury Employees Union, also noted that the legislation provides only “a temporary reprieve” as agencies are already grappling with tighter funding. The IRS “will be in a particularly tough position just as the 2013 filing season gets under way,” Kelley said in a statement. The agency, she said, “has already seen severe budget cuts that have reduced its personnel and stretched its ability to help taxpayers comply with an increasingly complex tax code.”
The deal means the Pentagon’s budget — which could approach $633 billion in 2013 when including spending for ongoing military conflicts — will avoid sequestration cuts of roughly $50 billion for now.
Larry Korb, of the Center for American Progress, said the delay “means the Pentagon won’t have to do things like cancel [weapon] contracts, cancel training or put off base maintenance.”
Senior defense officials have said they can absorb some new spending cuts without a major impact on the Obama administration’s almost year-old DoD military strategy. Some insiders, including Korb, expect in coming months the Defense Department’s budget will be slapped with a $100 billion reduction — likely spread over several years — to help with further federal deficit-reduction efforts.
Pentagon Comptroller Robert Hale and other officials have said furloughs would have been ordered, meaning DoD civilian workers might have been sent home as a way to pay for other activities, such as operations in Afghanistan.
In a late-December memo to DoD employees, Defense Secretary Leon Panetta said Pentagon officials would have to “carefully examine other options to reduce costs” before ordering furloughs.
But, for the Pentagon, lawmakers could still act in January and avert the worst-case scenarios.
“I do not expect our day-to-day operations to change dramatically on or immediately after January 2, 2013, should sequestration occur,” Panetta wrote in the memo.
The armed services have not been tasked with developing sequestration implementation plans, sources say. That’s because the services depend on Congress for guidance and are reluctant to act until lawmakers’ collective will is known.