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1 March 2013

The term “Fiscal Cliff” was coined by Ben Bernake, chairman of the Federal Reserve, and used to describe the effects of the debt ceiling deal from 2011. Although it was a phrase widely used by politicians and members of the media alike, much was left unexplained about this so called “Fiscal Cliff” and how it relates to our most recent financial conundrum, “The Sequester.”

The “Fiscal Cliff” was a result of a  combination of deadlines from the Budget Control Act of 2011 (S 365) and the Temporary Extension of Tax Relief of 2010 (HR 4853). The BCA created a “Joint Select Committee on Deficit Reduction” which was tasked with establishing a plan to reduce the deficit and debt. If this committee could not agree on a workable plan to accomplish this, certain cuts would go into effect January 1, 2013.

In the week before the deadline, HR 8, the Job Protection and Recession Prevention Act of 2012, was passed. This bill Extends the Economic Growth and Tax Relief Reconciliation Act of 2001 from December 31, 2012 to December 31, 2013 (which you can find in section 102 of the text). It also requires Congress to introduce a bill to provide for “comprehensive tax reform” no later than April 30, 2013, and requires this bill to be expedited through the House of Representatives and the Senate (found in section 203). You can read the full text and other highlights of the bill from Vote Smart here. And don't forget to check back- our full synopsis of the bill is coming soon!

While HR 8 extends the Economic Growth and Tax Relief Reconciliation Act of 2001 and requires that Congress introduce a bill aimed at accomplishing “comprehensive tax reform,” it didn't solve the whole problem that the Joint Select Committee on Deficit Reduction was supposed to tackle. It delayed the decision for spending cuts to today, March 1.

The "Sequester” actually refers to a budgetary procedure first outlined in the Balanced Budget and Emergency Deficit Control Act of 1985*. Essentially, the Congressional Budget and Impoundment Control Act of 1974 created a legal process for setting deficit limits for budgets. The Balanced Budget and Emergency Control Act of 1985 further outlined what happens when Office of Management and Budget (OMB) and Congressional Budget Office (CBO) project a deficit that is too big – stuff gets “sequestered”. What that means is that any parts of the budget that are “sequestrable” are cut according the calculations provided by law.

This doesn't happen a lot because when a budget is proposed or passed CBO and OMB calculate what will be added to the deficit and adjust our discretionary spending limits accordingly. But the Budget Control Act of 2011 changes the process a bit. It proclaims that if a special committee does not achieve a certain amount of deficit reduction over the next 9 years, the discretionary spending limits will be changed – automatically, regardless of what budgets have or have not been proposed.

If you remember the Joint Select Committee on Deficit Reduction, you probably remember that they were unable to establish a plan to reduce the debt and deficit. So because of that our discretionary spending limits were changed – for the next 9 years. And the $1.2 trillion in cuts over 9 years that the super committee was supposed to find: they became mandatory, and the process through which they get enacted is, you guessed it, sequestration.

*Also known as the Gramm-Rudman-Hollings act, this law was deemed unconstitutional in 1986. A second act, often referred to as Gramm-Rudman-Hollings II was passed in 1987.

Related tags: blog, Congress, sequestration

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