Center for American Progress

RELEASE: CAP Outlines Plan to Replace the Sequester
Press Release

RELEASE: CAP Outlines Plan to Replace the Sequester

Read the report.

Washington, D.C. — With the government shutdown and the threat of a catastrophic debt default behind us, it’s time to turn to the real fiscal task at hand: reversing damaging austerity policies and investing in growth, according to a new report released today by the Center for American Progress. Included in the report is a proposal to replace the damaging and counterproductive sequester with a reasonable, manageable plan that includes some upfront investment in economic growth.

“The sequestration cuts were deliberately designed to be so draconian, painful, and blunt that Congress would work together to find an alternative,” said Michael Linden, author of the report and Managing Director for Economic Policy at the Center for American Progress. “Unfortunately, they did go into effect and as a result, children were deprived of preschool, cancer patients were turned away, the U.S. court system experienced delays, and our entire economy suffered. The absurdity of continuing these failed policies should be clear.”

As Linden points out, the sequester is entirely unnecessary for achieving the goal of a sustainable federal budget—its entire purported purpose. In fact, today’s budget projections without sequestration are actually better than what was originally projected with sequestration. In August 2011, the federal budget deficit from 2014 to 2021 was projected to total $5.5 trillion with the sequester in place, for an average deficit of 3.3 percent of gross domestic product. Today, without the effects of the sequester, the deficit is projected to total $5 trillion over the same period, for an average deficit of 3 percent of GDP. In other words, if we simply repealed the sequester in its entirety, our budget deficits would still be about $500 billion lower than what they were expected to be after the sequester was originally passed into law.

In a rational world, that is exactly what we would do—simply repeal the sequester. It is harmful, shortsighted, and totally unnecessary. Unfortunately, we do not live in that world yet. Tea Party members of Congress and their allies see the sequester as a victory that should be protected. Single-issue deficit reduction groups will oppose anything that increases the debt under nearly any circumstances. And many policymakers have simply not fully come to grips with the new economic and fiscal realities—for example, the dramatically improved budget outlook and the spectacular failure of austerity policies in Europe.

As a result, the most realistic approach to fixing the sequester at this point is to replace it with smarter deficit reduction—even if that deficit reduction is largely unnecessary right now. To that end, CAP’s report proposes a reasonable plan to replace the sequester through 2016. The plan is based on four principles:

  • Keep it manageable. Congress has proven that it is unable to “go big,” so we should go small instead and find a way to address the sequester in the short term.
  • Apply the savings from the fiscal-cliff deal. The sequester was supposed to achieve $1.2 trillion in legislated deficit reduction, and the fiscal-cliff deal has already achieved 60 percent of that.
  • Balance is important. Most of the deficit reduction we have achieved so far has been from spending cuts. The sequester replacement must include some revenue as well.
  • Focus on the economy. Merely avoiding the economic harm of the sequester is not enough. We need to take affirmative steps to boost growth and invest in the future.

The replacement plan itself includes the following elements:

  • Repeal the sequester for fiscal years 2014, 2015, and 2016. The total “cost” to the federal bottom line would be approximately $315 billion not including increased debt service costs. But because we have already paid for 60 percent of the sequester, we need only offset about $126 billion.
  • Implement competitive bidding more broadly throughout federal health care programs. Competitive bidding for medical equipment and devices, for clinical laboratories, and in Medicare Advantage will lower prices for the federal government, resulting in nearly $50 billion in savings over 10 years.
  • Better alignment of Medicare payments to actual costs. Medicare payments for services from a number of different providers—including home health providers, skilled nursing facilities, and some hospitals—are currently substantially higher than the actual costs of treatment. Bringing those payments down to reflect the providers’ true costs will reduce federal spending by approximately $50 billion over 10 years.
  • Reduce agriculture subsidies. Our current system of agricultural subsidies is outdated and costly. Reforming this system along the lines proposed by President Obama would save approximately $40 billion over 10 years.
  • Implement the “Buffett Rule.” Overall, our federal tax system is progressive—meaning that higher-income households on average pay a greater share of their income in taxes than do middle- and low-income households. This is not always true, however. There are many very high-income households who are able to avoid paying even middle-class rates. The Buffett Rule would ensure that millionaires are paying at least the same tax rates as most other high-income households. It would raise approximately $100 billion over 10 years.
  • Repeal fossil-fuel industry tax subsidies. The fossil-fuel industry currently receives numerous tax breaks. Given the profitability of leading fossil-fuel companies, these tax subsidies are entirely unnecessary. Repealing them would save about $40 billion over 10 years.
  • Invest in job creation and growth. Our plan also includes room for a little more than $80 billion in investments that would spark faster growth today and lay the foundations for faster growth tomorrow. These include a $20 billion down payment for the first five years of the president’s early childhood initiative, a $50 billion investment in infrastructure, and a $12 billion investment in the “Pathways Back to Work Fund,” which would help provide employment opportunities for the long-term unemployed, young people, and low-income people.

Read the report: Replacing the Sequester by Michael Linden

See also: STATEMENT: Neera Tanden on Congressional Deal to Avert Default and Reopen the Government

To speak with an expert, contact Katie Peters at [email protected] or 202.741.6285.