Chris Krueger, the plugged-in political analyst at GS Washington Research Group, gives his best guess on how the sequester will play out:
Once the media begins pumping out human-interest stories on the impact of sequester (imagine USA Today and People Magazine articles on Air Traffic Controllers and meat inspectors being furloughed, etc.), Washington will very likely fold on the sequester fight, find enough change in the government sofa cushions, and patch together something to either replace or dilute some or all of FY13’s ~$85B in sequester cuts.
And here are three possible endgames:
1. Gimmicks (An Obama win):
There are plenty of revenue gimmicks still available, including reviving last summer’s Pension Funding Stabilization, User Fees (TSA fees or fees pertaining to the Inland Waterways Trust Fund), and higher PBGC premiums. In terms of cuts, the ATRA model can be used again or the Senate Democratic spending cuts (defense cuts starting in FY15 and ~$30B in farm subsidy cuts) could come into play. It costs approximately $12B per month to replace sequester, which is not a big number by Washington budget standards – particularly when you have the 10-year budget window.
2. A highly modified continuing resolution (Pick ‘em):
The lack of an FY13 budget and FY13 appropriations bills makes everything more complicated as the government is being run by the CR. However, the CR expiration gives you a vehicle to tweak sequester. In the new FY13 CR, lawmakers could insert language giving the agencies greater flexibility on sequestered cuts. Senate Appropriations Chair Mikulski (D-MD) is advocating a full omnibus that would fund all the government agencies for the remainder of FY13. They could also pass a “mini bus” of FY13 appropriations bills for the national security agencies (Homeland Security and Department of Defense) that would remove some of the anxiety and downside brewing for the Pentagon. At a bare minimum, the eventual CR (or Omnibus or Minibus) provides a legislative vehicle to attach some sequester tweaks.
3. Put away the meat ax for defense (A GOP win):
The primary objection to the FY13 sequester is the “meat ax” approach to the cuts and their across-the-board nature. Senate Armed Services Ranking Republican James Inhofe (R-OK) has floated a proposal that would keep the meat-ax in place for the non-defense cuts, but to give the Pentagon flexibility on the ~$42B in FY13 sequester cuts to defense. This proposal – if applied to all the cuts – could be a “fail safe” option if all other solutions fail. The sequester dollar amounts would remain, though instead of applying to every agency program, the agency chiefs would cherry pick the cuts. The Obama Administration opposes this because their agency chiefs would in effect “own” the cuts and the resulting public/media outcry.
The kick-the-can options could create a situation where the sequester continues to hang around, a new version of the AMT Patch and Doc Fix. Krueger: “Our base case remains a series of endless policy cliffs. Short-term extensions of these cliffs could result in an endless game of kick the can — until the can kicks back.”