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How a Spending Stalemate Would Affect the States

“A self-inflicted wound” to a struggling economy. “Ham-handed cuts” nobody thought would actually happen. “The big, dumb spending cuts that no one wants.”

Those are just three descriptions given to the looming federal budget reductions that are scheduled to take effect Jan. 2, 2013, unless Congress stops them. If they are enacted, more than $1.2 trillion would be cut from federal spending in the next ten years, including nearly $110 billion next year alone. The specter has produced jitters around the country. Heightening anxiety is the broader, so-called “fiscal cliff,” a term that adds in the tax cuts also set to expire at the end of this year.

And there’s reason to fear. The Congressional Budget Office has said going over the fiscal cliff would plunge the country back into recession in the first half of 2013. Unemployment would climb back over 9 percent, and economic growth wouldn’t return for two years.

“Basically, this is a nightmare,” Jared Bernstein, a former economic adviser to Vice President Joe Biden and a senior fellow at the Center on Budget and Policy Priorities, said at a recent briefing. “This economy really doesn’t need another self-inflicted wound, and that’s what this would be.”

But for state and local governments in particular, the budget cuts would have acute and tangible ramifications. The reductions, known as the “sequester,” would be made across the board to a broad swath of federal spending. The cuts could not only ravage economies, but force states to backfill funding and scale back countless safety net programs.

Under the sequester, as laid out in the resolution to the 2011 debt ceiling crisis, the cuts would be divided between defense and non-defense discretionary spending. In the next fiscal year, for example, defense-related discretionary spending would be cut $54.6 billion, or 10 percent. Non-defense would be cut $38 billion, or 7.8 percent.

Big-ticket state-federal items such as Medicaid are exempt. Social Security and the bulk of Medicare spending are as well, although Medicare providers are facing a 2 percent, or $11 billion, cut.

But holding those programs harmless means the cuts will fall on about a third of the federal budget, and much of the federal bureaucracy. The Federal Aviation Administration, which supports the operation of airports large and small, would be cut, along with Congress’ own budget. Almost every federal agency, from the Small Business Administration to the Army Corps of Engineers and NASA, would face reductions. Even the IRS’ fund for paying informants would be cut by $10 million.

Spending cuts wouldn’t differentiate between programs on the basis of necessity or effectiveness; reductions would be imposed broadly and equally. As the White House put it in a recent Office of Management and Budget report: “Sequestration is a blunt and indiscriminate instrument. It is not the responsible way for our nation to achieve deficit reduction.”

Cuts to the States

Of all the myriad reductions threatening states, there’s one that seems to have generated the most public concern: cuts to education.

States are set to receive more than $15.7 billion in basic elementary and secondary education dollars from the federal government, which includes Title I funding for the disadvantaged. Under sequestration, that would be cut nearly $1.3 billion. The $12.6 billion in federal money for special education would also be reduced more than $1 billion.