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Fiscal Cliff Agreement Delays Sequester, Battle over Spending Cuts

January 4, 2013—The agreement between the White House and congressional Republicans to avert the “fiscal cliff” postpones for two months the automatic spending cuts set to take effect Jan. 3, but sets up another budget showdown around the time the federal government is expected to run up against the statutory limit of borrowing.

The Taxpayer Relief Act of 2012 (H.R. 8), which the president signed Jan. 2, requires the White House to issue its sequestration order on March 1.  The cuts would be implemented on March 27, the same day that the current six-month continuing resolution (P.L. 112-75) funding the federal government expires.

The law reduces the total sequester amount by $24 billion, from $1.2 trillion to $1.176 trillion. This cost is offset by $12 billion in discretionary spending cuts, implemented by reducing the spending caps in FYs 2013 and 2014, and by $12 billion in new revenue from a provision related to Roth Individual Retirement Arrangements (IRAs). 

Half of the $12 billion in discretionary cuts comes from defense, the other half from nondefense discretionary spending (NDD).  The bill reduces the spending caps for each category by $2 billion in FY 2013 and by $4 billion in FY 2014.

Democrats are hopeful that the fiscal cliff agreement sets a precedent that future deficit reduction efforts will be based on 50 percent revenue increases and 50 percent spending cuts.  In a statement following passage of H.R. 8, House Minority Leader Nancy Pelosi (C-Calif.) said, “With the passage of this measure, we strengthen the principle that we must have equal parts revenue and spending cuts as we work to reduce our deficit."

But Republicans will try to use the vote on the debt ceiling to leverage spending cuts.  In a Jan. 2 press release, Senate Minority Leader Mitch McConnell (R-Ky.) said, “The President claims to want a balanced approach to solve our problems. And now that he has the tax rates he wants, his calls for ‘balance’ mean he must join us in our efforts to achieve meaningful spending and government reform. We have an immediate opportunity to act: the debt ceiling.”

However, President Obama reiterated his vow not to negotiate over the debt limit.  In a Jan. 1 statement on the fiscal cliff agreement, the president said, “[W]hile I will negotiate over many things, I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed…. If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic—far worse than the impact of a fiscal cliff.”

The federal government technically reached the debt limit Dec. 31, 2012 but the Treasury Department is using “extraordinary measures” that Treasury Secretary Timothy Geithner estimates will provide $200 billion headroom under the $16.4 trillion limit, enough to last about two months [see Washington Highlights, Dec. 28, 2012].


Dave Moore
Senior Director, Government Relations
Telephone: 202-828-0559


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