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Looking Past the Cliff: Can OMB Strategies Prevent a Recession?

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The Department of Defense might be particularly susceptible to cutbacks.

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Absent a last-minute deal this week between President Obama and Congress to avert the fiscal cliff, more than $100 billion in long-feared across-the-board cuts in defense and domestic programs will begin to kick in next week. The Pentagon would feel the sting of budget cuts averaging 9.4%, while domestic programs would be slashed, on average, 8.2%, according to administration estimates.

Defense and aerospace industry executives have repeatedly warned that left unabated these automatic cuts – or sequestration, as they're known – could lead to more than one million layoffs in states from Virginia to California. Public employee unions are fretting about the possibility of tens of thousands of furloughs and layoffs as well.

"One last time, while we continue to draw nearer to the edge of the cliff, I would ask our leaders in Congress and in the administration, please put your differences aside, sit down across the table and get the job done," Marion C. Blakey, president and CEO of the Aerospace Industries Association, said in a recent speech. "Pull us back from the cliff and away from sequestration, toward an agreement that saves jobs, preserves national security, and safeguards American competitiveness."

Unless Congress and the administration intervene, experts predict that the $50 billion of defense cuts and $50 billion of domestic savings – combined with the expiration of Bush-era tax cuts – likely would send the economy back into a recession. Overall, sequestration would force $1.2 trillion of relatively arbitrary spending cuts in government agencies and programs over the coming decade.

Just as the Treasury used accounting tricks and gimmicks in 2011 to buy time before bumping up against the debt ceiling, the White House Budget office has tricks up its sleeve to blunt the short-term effects of sequestration by giving Obama and Congress more time to hammer out some sort of agreement.

TOOLS AT ITS DISPOSAL

The Office of Management and Budget, headed by Jeffrey Zients, a former corporate CEO, will have enormous say in how federal funds are allocated throughout the government and the timing of expenditures and cuts. Patrick Lester, director of fiscal policy at OMB Watch, a watch-dog organization, contends that the White House and congressional leaders would not create an immediate crisis by taking an extra month to reach a balanced budget and tax deal – even if sequestration takes effect.

The executive branch has a variety of tools at its disposal to deal with the cuts on a short-term, temporary basis, Lester wrote, including controlling the rate of federal spending during the first few weeks of the year, delaying the announcement of new federal contracts and grants until later in the year, redirecting funds to more urgent activities, and using spending options to prevent agency layoffs.

Secretary of Defense Leon Panetta late last week tempered his previous dire warnings that sequestration would undermine national security and lead to immediate layoffs or furloughs of civilian employees who are not covered by an exemption on military personnel.

"These cuts, while significant and harmful to our collective mission as an agency, would not necessarily require immediate reductions in spending," Panetta said in a letter to the military establishment. "Under sequestration, we would still have funds available after January 2, 2013, but our overall funding for the remainder of the year would be reduced. Accordingly, this situation is different from other scenarios we have encountered in recent years, such as threats of government shutdown due to a lapse in appropriations."

Once funds have been appropriated by Congress, it is up to the executive branch to decide how to spend that money throughout the year. OMB has the authority, known as apportionment, to accelerate spending for programs as needed in fiscal 2013. This would offset the impact of sequestration for a short period of time.
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