What the Fiscal Cliff Agreement Means for FY2012 Spending

Under the fiscal cliff agreement, the sequester has been postponed for two months, to March 2. The agreement also reduces the size of the sequester, from $109 billion to $85 billion, which will be squeezed into seven months, rather than nine. Provided there are no changes prior to March 2, discretionary spending will still need to be cut by approximately $12 billion per month. Keep in mind, however, that the current Continuing Resolution (CR) expires March 27, so prior to that date Congress will need to (a) pass all of the twelve appropriations bills; (b) pass some of the appropriations bill plus a minibus for the remaining bills; (c) pass an omnibus covering all of the bills; or (d) pass another CR for the remainder of FY13. I would bet heavily on d. Keep in mind that at that point Congress is supposed to be working on the FY14 appropriations bills.

Also keep in mind that something will need to be done to raise the debt limit, which the Treasury Department says has already been hit, prior to that date. President Obama has drawn a line in the sand, stating that he won’t negotiate over the debt limit. On the other side, it appears that some number of House Republicans agreed to vote for the fiscal cliff agreement, which included no spending cuts, precisely because they were promised they could revisit the issue as part of a debt limit deal. Recall that the current sequester resulted from the 2011 agreement to raise the debt limit. So despite the president’s statement, it’s highly likely that a new agreement to raise the debt ceiling will include new spending cuts, which could include changes to the March 2 sequester.

It would be difficult to dream up a scenario in which there’s greater uncertainty over the levels of discretionary spending than the one that’s existed over the last several months, but that’s what we’re currently facing. Over the last year, federal managers needed two budget plans, one under the CR, and one that planned for the sequester. Now there’s still greater uncertainty, not only over whether or not the sequester will occur, but also over whether or not the CR will be extended, as well as whether the size and shape of the sequester will be renegotiated as part of a debt limit deal.