Origins of the Sequester

The mechanism of sequestration was originally conceived of more than a quarter century ago. It was designed to force Congress to deal with rising federal debt and budget deficits and, should that fail, to automatically cut funding to government agencies and programs. The sequester made its legislative debut in the Balanced Budget and Emergency Deficit Control Act of 1985, known as Gramm-Rudman-Hollings (GRH), after the three senators who authored the legislation. Until this year, the only significant implementation of a sequester in the law’s history was the year after its enactment, in 1986.

Historical Context and the Original Sequester Provision

In the 1980s, deficits were increasing, as a result of the 1982-83 recession and deliberate legislative decisions by Congress. Indeed, it had enacted tax cuts and defense spending increases despite the ballooning gap between federal revenues and expenditures. Eventually, however, pressure to act on the growing deficit came to a head, and, foreshadowing the circumstances under which the Budget Control Act of 2011 was passed, the legislative language that became GRH was amended to a bill in December 1985 that increased the federal debt ceiling.*

The law set declining, fixed, annual deficit targets that, if met, would balance the budget over a six-year period.** Anticipating that future Congresses might be unable or unwilling to meet those targets, GRH also included a budgetary mechanism for reducing spending regardless of congressional action. The legislation mandated that in the August before the start of each applicable fiscal year, the Congressional Budget Office (CBO) partner with the Office of Management and Budget (OMB) to detail the projected outlay, revenue, and deficit levels for the upcoming fiscal years. This document – called a “sequestration report” – would allow lawmakers to determine whether they were meeting the required deficit targets. If they were not, they would still have a short time window before the fiscal year began to enact policies that would rein in the deficit to predetermined levels, thus avoiding a sequester.

But if Congress failed to act, the law mandated that, by presidential order, previously-authorized spending be cancelled to meet the deficit targets. Part of an agency’s funds for the year would be rescinded, literally “sequestered.” Moreover, the provision mandated that these cuts be split equally between defense and non-defense programs, with the legislative text providing a list of programs that were exempt or given special rules for application of the sequester.

Most policymakers at the time did not want the sequester to go into effect – it was merely intended as a backstop against the failure to control escalating deficits. In the words of then-Senator Phil Gramm (R-TX), one of the namesakes of the legislation, “it was never the objective of [GRH] to trigger the sequester; the objective of [GRH] was to have the threat of the sequester force compromise and action.” In signing the bill into law, President Reagan stated that he did so “with great reluctance,” and that it was a “fix that did not fix anything,” yet he had no choice but to acquiesce since the sequester mechanism was tied to increasing the statutory debt limit.

The FY 1986 Sequester

After much deliberation, GRH passed in December of 1985, with the first deficit target established by the law applying to Fiscal Year (FY) 1986. However, because fiscal years begin on October 1, FY 1986 already was underway. Moreover, the budget deficit for that year was projected to be greater than the target set by GRH, requiring $24 billion to be cut from budget authority.*** This meant that policymakers did not have an opportunity to avoid the sequester in that first year – they had, in effect, already agreed to those cuts by enacting the bill.

Thus, midway through FY 1986, President Ronald Reagan officially issued a sequester order and OMB carried it out by issuing a formal report outlining the cuts to the programs, projects, and activities impacted. At the time, each department then issued guidance to programs within its jurisdiction on how to plan around and implement the required across-the-board reductions. The sequester effectively reduced the deficit, bringing it in line with GRH’s requirements.

Later Sequesters & The Budget Enforcement Act of 1990

Lawmakers were willing to live with the reductions in the first GRH sequester year largely because the magnitude of those cuts was known as the legislation was enacted. After the initial sequester of FY 1986, however, members of Congress realized that meeting the deficit targets established by the law for the succeeding fiscal years would be challenging, requiring significant spending cuts or revenue increases.

As FY 1987 approached, the GRH fixed deficit target had not been achieved, and the CBO/OMB sequestration report indicated that a sequester was pending. Congress and the president enacted some limited deficit reduction measures, but did not close the entire gap. The rest of the discrepancy was overlooked, with Congress legislatively “turning off” the sequester for that year.****

The following year, Congress was faced with the prospect of yet another sizeable automatic reduction for FY 1988. It became apparent then that the growing size of the scheduled sequester cuts was increasingly untenable for both policy and political reasons.

Policymakers were left in a bind. They had concluded that the fixed GRH deficit targets as a path to a balanced budget were too aggressive. But, given public awareness of the deficit issue, there was little appetite on Capitol Hill for throwing fiscal controls out the door wholesale. Thus, it was decided that the fixed GRH deficit targets needed to be modified. In September 1987, President Reagan signed into law the Reaffirmation Act of 1987 – referred to by some as GRH II – which relaxed (but did not eliminate) the deficit targets, thereby pushing back the date for achieving a balanced budget. Additionally, although the FY 1988 sequester temporarily went into effect, those reductions were rescinded by subsequent legislation.

For FY 1989, the newly-relaxed deficit target was loose enough for Congress and the president to avoid that year’s sequester with a minimal amount of deficit reduction – and they did so. Eventually, however, history began to repeat itself, and the FY 1990 sequestration report found that Congress would fail to meet the GRH II target by a substantial amount. After the fiscal year had begun, policymakers scrambled to avoid the scheduled cuts by passing the Omnibus Budget Reconciliation Act of 1989, which contained some deficit reduction measures, thereby significantly curtailing the magnitude of the FY 1990 sequester.

That proved to be the final year for which the GRH II fixed deficit targets remained tenable. In 1990, economic growth sputtered, turning into a recession by the fourth quarter. When partnered with Congress’ failure to pass any significant deficit reduction legislation, these conditions led to an initial sequestration report for FY 1991 showing a shortfall of over $100 billion from the target. This would have resulted in cuts to budget authority of roughly 50 percent for non-exempt defense and non-defense programs – truly unfathomable reductions.

With gargantuan cuts looming, congressional leaders and President George H.W. Bush began negotiations that culminated in a summit at Andrews Air Force Base. There, the parties agreed to the Budget Enforcement Act of 1990 (BEA), which jettisoned the GRH II fixed deficit targets (and with them, the original sequester procedure) and replaced them with the implementation of alternative deficit reduction policies. The agreement was enforced through caps on discretionary spending and a pay-as-you-go rule for mandatory spending and revenues, with breaches in any area subject to a modified sequester mechanism.

Lessons Learned

Those looking to history for precedent have clear evidence that policymakers have rarely allowed sequesters to be carried out: The original FY 1986 sequester was the only sizeable one ever implemented and sustained. Moreover, some deem it a “legislated sequester” because, as mentioned, passage of the GRH law guaranteed in advance that the cuts would occur.

This is not to say, however, that the mechanism proved useless. After all, the real goal of the sequester never was to slash programs across the board. Rather, the procedure was designed to encourage policymakers to confront hard choices and arrive at consensus in order to avoid triggering harsh cuts. But, then as now, the sequester was not always the most convincing of sticks. Like the Joint Select Committee on Deficit Reduction’s failure in 2011 to meet its $1.2 trillion deficit reduction target, Congress only met the GRH deficit levels in one (FY 1989) of the four years that they were in effect, and even that one was after the goalposts had been moved under GRH II. It was a long slog, and lawmakers routinely chose to mitigate, override, or delay the annual sequesters.

Ultimately, however, the growing threat from the continued looming cuts was what spurred action. The sequesters forced policymakers to make decisions – and eventually, substantive changes to fiscal policy in the form of the BEA – that proved critical for the nation’s economic well-being and eventually helped usher in a series of balanced budgets at the end of the 1990s.

* This is the first time that the debt ceiling was increased above $2 trillion.

** See this Congressional Research Service report on statutory budget controls for more information.

*** The required budget authority cuts were $24.3 billion even though the annual deficit only exceeded the GRH target by $11.7 billion. That difference arises because of the distinction between how much money Congress authorizes in a certain year for the government to spend over time, known as “budget authority,” and how much actually is spent in that year, referred to as “outlays.” Each fiscal year, under regular order, the appropriations committees in Congress authorize particular amounts of spending for individual government agencies and programs. Sometimes, these allocated funds are spent in their entirety during that particular fiscal year—such as personnel salaries—but for programs with a longer duration, some of the funds also are spent during subsequent fiscal years. Thus, there is a timing difference between the budgetary authority that Congress grants the government (the discretionary appropriations that are made available) and outlays (the actual spending in a given fiscal year, which lags behind appropriations).

For a simplified example, consider a $10 billion aircraft carrier on which construction is scheduled to begin in FY 2013. Congress may appropriate the full $10 billion in FY 2013, but the carrier actually will be constructed over, say, five years – $4 billion will be spent in FY 2013, and then $1.5 billion will be spent in each of the next four fiscal years. These outlays occur as the funds actually go out the door at the Department of Defense.

Most important for this discussion is that the budget deficit is calculated on the basis of outlays, by subtracting the amount of money the government is spending that year from the total amount of revenues it collected. Thus, in FY 1986, the sequester needed to reduce the deficit, and therefore outlays, by $11.7 billion. There is, however, no way to cut outlays – or the money expended during a fiscal year – directly; only the budgetary authority provided by Congress can be reduced. Consequently, to meet its specific deficit reduction goal, the original sequester had to cut substantially more budget authority than the size of the required outlay reductions.

**** See this Congressional Research Service report on statutory budget controls for more information.

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