Created by on 07/17/2012

With control of the White House, Senate, and House at stake in the November elections, many in Washington believe that Congress and President Obama are not expected to compromise on major policy or spending issues anytime soon. The delay in making decisions on unfinished legislative business suggests that the likely outcome is either a kick-the-can-down-the-road temporary solution or enactment of an historic grand compromise between the president and Congress on the thorny issues of taxes, spending, and entitlement reform during a post-election “lame duck” session. There is much speculation about the various scenarios and how the outcome of the voting in November and the state of the economy could impact the timing of congressional action. 

Important Upcoming Dates on the Legislative Calendar
August 6th – September 9th
Summer recess
October 1st
Start of fiscal year 2013
October 8th – November 12th
Congress in recess
November 13th – December 31st
Potential dates of “lame duck” session
January 2nd
Sequestration begins
At a minimum, the entire federal government will operate under a “continuing resolution” (CR) from October 1, 2012 until at least late-November when Congress returns for a “lame duck” session that could address the unfinished 2013 appropriations bills. However, it is more likely that the government will operate under a series of CRs until the new Congress convenes in January 2013. Aside from funding the government, lawmakers will also have to address a variety of other issues later this fall, including:
  • Reaching agreement to defer or avoid sequestration
  • Raising the debt ceiling (sometime between December 2012 – March 2013)
  • Extending high priority pieces of legislation set to expire December 31st:
    • Bush tax cuts
    • Unemployment benefits
    • Payroll tax holiday
    • Medicare (“doc fix”) Sustainable Growth Formula   
    • Alternative minimum tax
    • Estate tax
  • Completing reauthorization of the farm bill
  • Addressing the Supreme Court’s decision on the healthcare reform law
A lame-duck session could free up departing lawmakers to make compromises, but completing work on the above list of what needs to be addressed in a compressed amount of time is unprecedented. Although there are 34 weekdays (excluding Thanksgiving, the day after Thanksgiving, and Christmas) between Election Day and December 31st, the House is scheduled to be in session for only 16 of them. The Senate has not announced its schedule during that time period.
Whether lawmakers and President Obama will be able to reach agreement on a plan to reduce the deficit by $1.2 trillion over the next decade, as mandated by the Budget Control Act (BCA), is anyone’s guess at this point. Most budget experts have said that any deficit reduction agreement will have to include spending cuts, changes in the tax code, or a combination of those choices in order to avoid sequestration (automatic across-the-board cuts) of $109 billion in spending that will take place on January 2, 2013 if no other plan is adopted before then. Under sequestration, approximately half of the cuts will come from the military and the remainder from other federal programs. The White House Office of Management and Budget (OMB), which will be responsible for enforcing the sequestration, has not yet said what programs will be cut or by what percentages to reach the $109 million total. Congressional Budget Office (CBO) preliminary estimates show across-the-board cuts of eight percent. However, CBO’s calculation spread the cuts over the full twelve months of the fiscal year, and did not exclude all of the programs that the BCA protects. In reality, the automatic cuts will not take effect until the fourth month of the fiscal year, and the BCA exempts certain programs (veteran’s health care, Pell grants, Social Security, and others) from spending reductions. Given those factors, it is estimated that the remaining non-exempt programs will have to absorb larger cuts to reach the $109 billion total.
Based on public statements and legislation introduced to date, it is clear that each entity believes sequestration can be avoided if only the opposition would adopt their side’s proposal for deficit reduction. For example, the Senate Democratic leadership and White House contend that deficit reduction can be achieved through changes to the tax code to increase revenue. House Republican leaders have proposed to avoid sequestration by further reducing discretionary spending and using a process called reconciliation to achieve cuts to mandatory programs including Medicaid, benefits for federal workers, and food stamps. President Obama has said he will veto efforts to cancel the sequestration or shift the burden of the cuts from defense to non-defense social programs.
Further complicating the fiscal situation in Washington, Treasury Secretary Timothy Geithner said in May that the United States is expected to reach the $16.4 trillion debt limit (the amount the government is currently legally allowed to borrow) between mid-November and the end of the year. Geithner noted that the Treasury Department could take steps to delay the deadline until early 2013. The Secretary also pointed to the simultaneous expiration of the Bush tax breaks for nearly all Americans and the automatic budget cuts as "very powerful incentives" for lawmakers to find a way to put the country on a sound fiscal path. In response, House Speaker John Boehner indicated that raising the debt limit would only come with additional spending cuts. “Yes, allowing America to default would be irresponsible,” Mr. Boehner said. “But it would be more irresponsible to raise the debt ceiling without taking dramatic steps to reduce spending and reform the budget process.”
Given that agencies will likely start FY 2013 under a CR, without any clear indication of what Congress and the President will agree to by year’s end, the National Institutes of Health and all other agencies will have to start implementing plans to accommodate the automatic reductions scheduled for January 2013. However, because implementing the sequester is anathema to nearly everyone and it is a crucial piece of a highly charged political issue in the midst of a Presidential election year, federal agencies probably will not receive or dispense clear guidance on how the budget cuts will be implemented until well after November 6th. This kind of uncertainty will likely result in agency staff delaying spending decisions beginning early in the new fiscal year with little notice or explanation as they anticipate the start of the mandated sequester in January. Even if Congress decides to delay the start date of the sequestration, agencies are expected to be cautious and very conservative about their spending decisions beginning on October 1, 2012.