Sequestration: What It is, How It Works, Exemptions

What Is Sequestration?

Sequestration is a term adopted by Congress to describe a backup fiscal policy mechanism to enforce budgetary discipline over agreed-upon deficit reduction targets established under the 2011 Budget Control Act (BCA).

Sequestration, or "the sequester," is a procedure by which planned spending increases are moderated by pre-specified percentages if Congress fails to agree to a budget that meets agreed-upon caps on spending increases. These caps are set by the BCA before a specified date each year over the term of the sequester.

It is important to note that though sequestration is often referred to as a program of “spending cuts,” it imposes no actual reductions to spending. Instead, it only limits spending to smaller increases than some politicians, special interests, and Congress members would prefer.

Understanding Sequestration

Under the Budget Control Act of 2011 (BCA), Congress agreed to a series of caps on increased spending for each year through 2021. Congress passed the BCA to help resolve the debt ceiling crisis of 2011. This act increased the United States debt ceiling and established a 12-member committee (the Joint Select Committee on Deficit Reduction, or the “super committee”) to reduce the deficit by an additional $1.2 trillion to $1.5 trillion over the next decade.

Part of the BCA, also known as the debt ceiling compromise, called for sequestration if the super committee failed to reach an agreement, generating automatic spending increase limits for each of the nine years (fiscal years 2013–2021) of the Act.

This committee was unable to reach an agreement, and the American Taxpayer Relief Act pushed the budget cuts back until March 1, 2013. With Congress still unable to reach an agreement, sequestration was approved and went into effect on March 4, 2013.

Sequestration Reductions

With the sequester in place, as actual budget spending is set by Congress in each successive year, the BCA directs the Congressional Budget Office (CBO) to assess whether these caps will be exceeded by the planned spending increases. If they are, then the Office of Management and Budget (OMB) determines whether the law requires that sequestration will be imposed and how much the sequestered reduction in planned spending increases will be. 

These sequester percentage reductions in planned spending increases determined by the OMB, in theory, would apply across the board to virtually all federal discretionary and mandatory spending.

However, along with passing annual budgets each year, Congress has also raised the caps on increases in discretionary spending for each year to accommodate higher spending increases, so that federal discretionary spending has never actually been subject to sequestration. 

Exemptions on Mandatory Spending

Although the spending increase limits are “across the board,” most mandatory spending is exempt from spending caps and sequestration. This includes Social Security, veterans’ programs, Medicaid, other low-income assistance programs like Temporary Assistance for Needy Families (TANF) and the Supplemental Nutritional Assistance Program (SNAP), and net interest on the federal debt.

Congress has also acted to expand the categories of spending that are exempt, and the law adjusts the caps upward when the spending is designated as an emergency requirement.

Some mandatory federal spending has been subject to the sequester spending increase limits over the years. For these programs, planned and projected spending increases are compared to the statutory spending caps, and if they exceed the limits, then the calculated reduction percentages are applied to limit the increase in spending.

In everyday terms, this process is analogous to a family agreeing they will increase their household spending by $100 next month, then jointly making plans to increase spending by $200 next month, then reducing that increase by 50% so that they end up only actually spending $100, and then calling this a spending cut.

The Bottom Line

Sequestration was designed to enforce budgetary discipline. The Congressional Budget Office sets the caps, and the Office of Management and Budget decides whether sequestration will be required based on its estimates of government spending. Sequestration can affect many different areas of the federal budget, including mandatory spending such as Medicare.