U.S. lawmakers at the eleventh hour approved a deal that will delay across-the-board budget cuts until March 1.
The budget cuts – known as sequestration – were scheduled to take effect on Jan. 2, when the 112th Congress ends. The legislation passed by the Senate and the House on Jan. 1 avoids the so-called fiscal cliff of an increase in taxes coupled with sharp reductions in government spending, which economists had warned could push the nation back into recession.
The legislation allows taxes to rise on individual Americans making more than $400,000 a year, while maintaining other tax cuts. It also sets up another fight over sequestration that will occur as Congress resumes its debate over how to handle the deficit, entitlement spending and the debt ceiling.
A deal was hatched on New Year’s Eve by Vice President Joe Biden and Senate Minority Leader Mitch McConnell (R-Ky.), although a House vote was not assured. Throughout the day on Jan. 1, House Republicans remained divided and disappointed that the bill did not address spending cuts.
Rep. Buck McKeon (R-Calif.), the chairman of the House Armed Services Committee, planned to support the bill – with reservations – and called on the president and the next Congress to resolve sequestration “immediately.”
“As we continue down this uncertain road, we must keep in mind that cutting spending and raising taxes can only get us so far,” McKeon says. “We must allow our economy to grow if we are to resolve this debt crisis. We must also, finally, address the entitlement spending that is driving our debt.”
Now decoupled from the tax issue, it will be harder to reach a deal on defense spending reductions, says Todd Harrison, senior fellow of defense budget studies for the Center for Strategic and Budgetary Assessments.
“It puts Republicans in the hard spot of demanding different spending cuts – but cuts that Democrats are willing to go along with,” Harrison says. “It may turn out that there is no alternative set of spending cuts more palatable to both sides than sequestration. It is telling that the Republicans were the ones resisting even a delay in sequestration. If they really want spending cuts, this may be the best they can do.”
The most likely scenario, according to Byron Callan of Capital Alpha Partners, is that the’s investment accounts would decline by 2-3% annually between fiscal 2012 and 2015. But there is still a 25% probability that sequestration will be triggered in March or that the Pentagon would face about $50 billion in fiscal 2013 spending cuts, prompting about a 5% decline in investment budgeting authority.