Automatic spending cuts, pending tax hikes strike new recession fears

October 5, 2012 By    

On the campaign trail, members of Congress, President Barack Obama and GOP presidential candidate Mitt Romney are doing everything they can to deny responsibility for the economic buzz saw about to hit the country: automatic budget cuts called sequestration.

To make matters worse, while running away from the looming fiscal cliff, there is virtually no talk of how they are going to try and stop sequestration and what they are going to do about the Bush-era tax cuts that expire at the end of the year. There is near unanimous agreement among economists of all stripes that if this perfect storm occurs, we are headed for another recession – but this time by our own hand.

If Congress fails to reach a budget agreement this year, $600 billion in automatic cuts are scheduled to begin Jan. 2, 2013. This is as a result of the Budget Agreement Act of 2011, which included automatic sequestration as a last resort to force Congress to agree on a budget. With the exception of Medicare benefits and Social Security, few programs will be spared.

Last spring, the Congressional Budget Office warned of recession in 2013 due to the pending tax hikes and forced spending cuts. Federal Reserve Chairman Ben Bernanke warned of the risks. Wall Street is sending the signal that our government’s credit rating may be downgraded (again) if the national debt is not reduced. The Department of Defense is warning that across-the-board cuts will weaken our military.

A recent report from the White House’s Office of Management and Budget calls automatic spending cuts “deeply destructive to national security, domestic investments and core government functions.” It continues, “The destructive across-the-board cuts required by the sequestration are not a substitute for a responsible deficit-reduction plan. The president has already presented two proposals for balanced and comprehensive deficit reduction, but under our Constitution he cannot do the job alone.”

Funny thing is many of the members of Congress who voted in support of the Budget Control Act that placed sequestration as the last resort are now blaming the president for the problem. Critics of sequestration, Republicans and Democrats alike, say it is unfair because across-the-board cuts reward failing programs and penalize successful ones. Both sides, and the White House, are playing the blame game.

What are the options? Congress could pass a combination of spending cuts and tax increases, as many Democrats want. But for many Republicans, tax increases and/or new taxes continue to be dead on arrival.

They could decide the issue in a lame-duck session after the November election. This option seems unlikely. Time will be short and pressure to not make any lasting agreements high. And, if Republicans take control of the Senate and/or of the White House, the party will not want to let lame-duck Democrats lead the way.

The most likely scenario is to “kick the can” farther down the road. And while this may push the fiscal cliff down the road a few months, it is not likely to satisfy the ratings agencies that are threatening to downgrade U.S. credit.

But there still may be hope for a compromise.

Sen. Lindsey Graham, R- S.C., has discussed with fellow Republicans the possibility of raising revenue by closing tax loopholes and by fees for government service. This may be a way out for the “no-new-taxes” pledge of many Republicans. Other senators, too, have floated that compromise is possible; Senate Armed Services Committee Chairman Carl Levin, D-Mich., predicts there will not be a sequestration.

However, the closer we get to the fiscal cliff, the larger it looms. Congress and the White House cannot simply push this issue off until the next election, as they have with so many other issues. They must act.

It is hard to listen to the irrelevant rhetoric of political candidates knowing that our country’s long-term fiscal health looks so abysmal. Unfortunately, recent congressional history indicates that all we can expect is for Congress to continue to push tough decisions off on the next Congress, which will not serve our country in the long run.

Lisa Bontempo was a longtime energy lobbyist, including 13 years with NPGA. She remains involved in national politics and can be reached at

Comments are currently closed.