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As we reported last month, the Congressional Budget Office (CBO) warned in an August 22 report that if Congress fails to address a number of expiring tax provisions, reductions in Medicare physician payments, sequestration, extension of emergency unemployment benefits, and a reduction of 2 percentage points in the Social Security payroll tax, the economy will enter a downturn next year. At the time that report was released, however, few official details were available about the impact of sequestration, which was mandated by 2011's Budget Control Act.

In response to a legislative mandate, the White House Office of Management and Budget (OMB), on September 14, released a report detailing how the sequester, a default action of automatic, across-the-board spending cuts, will impact the federal budget program by program. "Sequestration is a blunt and indiscriminate instrument," the report states, "it is not the responsible way for our Nation to achieve deficit reduction." The OMB report goes on to say, "sequestration would have a devastating impact on important defense and nondefense programs."

The Pell Grant, among a select few programs with special treatment, is protected for one year from sequester cuts - during FY13 - but by and large all other federal student aid programs would be cut 7.6-8.2 percent, according to the OMB report. The Supplemental Educational Opportunity Grant and Federal Work-Study would be cut by 7.6 percent across the board. Federal college access programs, such as TRIO and GEAR UP, would see an 8.2 percent cut. The 1 percent origination fee for unsubsidized Stafford student loans would be raised by 7.6 percent, to about 1.1 percent of a total loan.

Most federal research budgets at agencies such as the National Institutes of Health, National Science Foundation, and Department of Energy would see an 8.2 percent reduction, but defense research would be subject to a 9.4 percent reduction.

Somewhat surprising is that the OMB report indicates that the federal subsidy payments for Build America Bonds (BABs) would be cut under the sequestration process. Of $4.241 billion of subsidy payments authorized for issuers of BABs and other direct-pay bonds in fiscal 2013, 7.6 percent, or $322 million, would be cut in 2013. According to The Bond Buyer, Treasury Department officials assured municipal bond issuers in 2009 that they could rely on receiving their BAB subsidy payments.

The 2011 Budget Control Act tasked a committee of legislators with cutting the budget in a more compromised and specific fashion, but on November 21, 2011, the Joint Select Committee on Deficit Reduction, or "supercommittee," issued a statement admitting that its members were unable to reach agreement on how to slash the federal deficit. By law, the supercommittee failure set up the sequester beginning in January 2013.

President Obama has taken the position that the cuts would be so excessive that Congress should act to halt the planned sequester. Republicans have focused on repealing the sequester's mandate for reductions to the Department of Defense. Some bipartisan coalitions continue to press for "going big," calling for plans to reduce the deficit by at least $4 trillion over the next decade. And others with stakes in both defense and domestic spending programs, such as federal student aid and research funding, have been lobbying legislators to stave off cuts to their interests.


Liz Clark

Vice President, Policy and Research


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