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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.

G. William Hoagland, a former Republican chief of staff of the Senate Budget Committee, agreed that OMB could use the apportionment process to slow the rate of spending cuts early in 2013 while the negotiations continue. "They could apportion the reductions more heavily in the fourth quarter of the fiscal year, as opposed to the second and third quarters," Hoagland said.

But that strategy is fraught with risk, noted Hoagland, now a senior fellow at the Bipartisan Policy Center. "If you think there's going to be a deal reached, then you can soften [the impact of the cuts]. But if a deal's not reached, then boy, that fourth quarter is really bad." That's because all of the spending cuts deferred in expectation of a deal would then have to be extracted from the operating budgets of the Pentagon and domestic government programs.

Robert D. Reischauer, a former director of the Congressional Budget Office, said that federal agencies will be "very cautious" in deciding how to best forestall the mandated spending cuts, "because they don't want to create huge problems for themselves in the future."

Last September, OMB issued a report warning of the looming cuts that lawmakers and policymakers say would be indiscriminate and could wreak havoc on government services, including scores of domestic programs. The cuts were mandated under the Budget Control Act of 2011 to end the debt-ceiling crisis. That legislation immediately cut government spending by $1 trillion and ordered an additional $1.2 trillion of automatic savings over the coming decade unless a special House-Senate "super committee" could agree to a package of cuts and additional revenue to meet that target. But the super committee failed to reach agreement late last year, helping to set the stage for the fast-approaching fiscal cliff of deep spending cuts and tax increases.

DELAYS IN PURCHASES, REPAIRS

For the Pentagon, allowing the automatic cuts to go into effect would mean delaying new equipment purchases and repairs, reducing services for military families, and reducing the readiness of units not actively deployed, according to the OMB report.

While the Department of Defense would be able to shift funds to ensure that war fighting and critical military readiness capabilities were not degraded, sequestration would result in a reduction in the readiness of many non-deployed units, delays in investments in new equipment and facilities, cutbacks in equipment repairs, declines in military research and development efforts, and reductions in base services for military families, the OMB report said.

The sequestration reductions would also mean fewer FBI agents and federal prosecutors; a dramatic reduction in federal scientific research; curtailed food inspections; and fewer air traffic controllers, according to the detailed 400-page report prepared by OMB. Sequestration would undermine investments vital to economic growth, threaten the safety and security of the American people, and cause severe harm to programs that benefit the middle-class, seniors, and children, according to the report. Education grants to states and local school districts supporting smaller classes, after-school programs, and children with disabilities would suffer as well, it also said.

Moreover, customs and border patrol agents, correctional officers, and federal prosecutors would be slashed. The Federal Aviation Administration's ability to oversee and manage the nation's airspace and air traffic control would be reduced, as would the Department of Agriculture's efforts to inspect food processing plants and prevent food-borne illnesses and the Environmental Protection Agency's ability to protect the air and water.

While White House aides have insisted they weren't planning for this scenario, Zients recently instructed agency heads to start preparing for the worst, according to Politico. Zients is likely to issue a report as early as January 3, the day after sequestration is set to take effect, explaining how the cuts will be implemented and signaling how much flexibility will be granted to department heads.

But the 1985 budget law guiding the process is complex, and Congress's jerry-rigged omnibus spending packages and conference reports will pose a number of perplexing obstacles to implementing sequestration.

"Congress needs to own up to the fact [that] sequestration was a massive mistake that is already eroding our prospect of continued economic growth," Scott Lilly, a former Democratic House Appropriations Committee staff director, said earlier this year. While a long-term budget and tax deal is more desirable, he said, Congress at a very minimum should delay the impact of sequestration until next October, to give the new Congress time to find a better solution.

Editor's Note: This article by Eric Pianin originally appeared on The Fiscal Times. Brianna Ehley of The Fiscal Times contributed to this article.

For more from The Fiscal Times:

Stephen Colbert Explains the Fiscal Cliff

The Myth of Being Rich at $250,000

Tax Hikes Over $250K: The End of the Upper Middle Class?


Follow The Fiscal Times on Twitter @TheFiscalTimes.
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