While everyone is focusing on tax rates, there's one major part of the fiscal cliff that is could hit the economy — hard — if Congress doesn't come up with some kind of deal.
Without a deal, on January 2 the first of $110 billion in cuts go into effect, slamming both the defense sector and the civilian sector of the federal government.
"Sequestration is a blunt and indiscriminate instrument," a report from the Office of Management and Budget says. "It is not the responsible way for our Nation to achieve deficit reduction."
In 2011 the solution to the Debt Ceiling negotiation was the Budget Control Act of 2011. The BCA said that a bipartisan supercommittee of 12 members must find a way to cut $1.2 trillion to $1.5 trillion over the next ten years.
In order to provide an incentive for the committee to reach a deal, the BCA mandated that in the event of their failure there would be automatic, across the board defense cuts to every defense and nondefense agency. This "sequestration" was designed as a deterrent to failure, and was designed to be remarkably unpalatable to every single person involved in the negotiation.
The supercommittee failed to reach a deal. After an additional year of gridlock, the nation in 2 days away from the blunt and indiscriminate cuts.
Automatic cuts will hit every single government program equally and individually. The way the cuts are structured, officials cannot shift the impact onto single programs or budget eliminations.
This is relatively uncharted territory, and the man making the plan to deal with it is Jeffrey Zients, the acting head of the Office of Management and Budget.
The administration did identify several "exempt" defense programs — specifically, veterans benefits, military health care and others — but every single non-exempt program then had to get hit a little more.
Last year's Budget Control Act provided specific percentages agencies have to cut in order to achieve $1.2 trillion in savings over 10 years. Here's the cost:
- 9.4 percent reduction for nonexempt defense agencies
- 8.2 percent reduction for discretionary nondefense agencies
On January 2, Zients will advise agencies on how much leeway they're allowed with the cuts.
For the Defense Department, this would likely mean that procurement programs – buying new ships, planes, and missiles — will be slowed or decreased. For example, an order of 100 Tomahawk missiles might be scaled back to 90 Tomahawk missiles.
For items where decreases can't be achieved — for instance, new Virginia-class submarines — production could be slowed to keep pace with the the annual reduction in funds, with each new sub hypothetically coming every thirteen months rather than every twelve months.
The cut would come in addition to a $487 billion cut coming as a result of the Iraq and Afghanistan draw downs.
As a result, POLITICO's Austin Wright reports, defense contractors are hoarding cash, looking into mergers and considering breaking up existing agreements.
For nondefense programs that will see 8.2 percent cuts, this could mean a cut in staff. The staff cuts could com from hiring freezes, attrition (not replacing departures) and, where possible, firings. This includes cuts to education, state aid, government-funded scientific research and the FAA.
This could have major impacts for citizens. For example, the Federal Aviation Administration cuts could lead to fewer flights and longer wait times for customers of airlines.
All told, there are ways to avoid or defer the cuts, and this could be handled in retrospect in the new year. Still, this could hit the economy especially hard in places dependent on government funds.