The last-second, nail-biting fiscal cliff agreement that Congress passed Jan. 1 is mostly focused on taxes, rather than spending, as has been widely reported. As a result of the deal, most of us have heard by now that the bill permanently extends Bush-era income tax cuts for individuals earning up to $400,000 and couples making up to $450,000, allows tax rates to rise for those earning more than that, and changes the tax code in a number of significant ways.
But the bill also has an impact on spending, including a sequestration
delay and changes to the discretionary spending caps for the next two years. What effect will those changes have on foreign aid and the programs InterAction members follow most closely?
The bill lowers the cap on discretionary spending, or the government money that Congress appropriates every year (as opposed to mandatory or direct spending, which is automatic and goes toward programs such as Social Security and Medicare). It sets the total discretionary spending cap for fiscal year (FY) 2013 at $1.043 trillion, which is $4 billion lower than the previous $1.047 trillion cap set in the Budget Control Act in August 2011. Congress will need to determine where to cut spending to cover the $4 billion reduction, which represents an approximate 0.4 percent cut to the total FY2013 budget. If the cuts are distributed evenly across all agencies and departments (which is by no means a certainty), a 0.4 percent cut to foreign assistance programs would translate into roughly $100 million less in FY2013 for the accounts InterAction cares most about. That said, Congress has not yet produced final appropriations for FY2013 to begin with, so it is impossible to know exactly what level to start from before subtracting the $100 million.
Security vs. Non-Security
The $4 billion in reduced discretionary spending will be split evenly between “security” and “non-security” spending, but due to some very complicated math, foreign assistance programs and the “150 account” as a whole (which funds most of our foreign assistance programs) has ended up back on the “security” side of the ledger for FY2013 (where it had temporarily been housed for a few months in 2011). This could mean foreign assistance will have to temporarily compete with defense, homeland security and veterans for congressional money.
The deal also postponed sequestration for two months, so that it will go into effect on March 1, unless Congress agrees to a deficit reduction deal before then. While many in our community had hoped for a more permanent fix for sequestration, a delay in sequestration is better than its immediate enactment: The across-the-board spending cuts for FY2013 will now total $85 billion when they go into effect in March, instead of $109 billion had they gone into effect in the beginning of January. Half will come from security spending and half will come from non-security spending. Due to a quirk in the new law, foreign assistance will return to the non-security side of the ledger when the current continuing resolution expires. Stay tuned for more details on that.
The bill does include some help for the world’s poor by extending most of the 2008 Farm Bill through the end of September. This extension includes authorizing funding for the McGovern-Dole International Food Program, as well as for Title II agreements under the Food for Peace Act (since they were not explicitly excluded from the extension). Had they been eliminated, the U.S. would have been unable to respond to disasters with Title II food aid.
The deal does not address charitable deductions directly. But it reinstates the so-called “Pease limitation,” (named for its original congressional champion), which reduces the overall value of itemized deductions of certain higher-earning taxpayers, for income levels starting at $250,000. So while the Pease limitation won’t harm charitable giving to the same extent as complete elimination of the charitable deduction might have, there could still be some downward pressure on charitable giving going forward.
Looking ahead, there are still a number of hurdles that policymakers will need to clear in the coming months: Treasury Secretary Timothy Geithner has already notified Congress that the debt limit has been reached and that Congress will need to raise it soon so that the Treasury Department will be able to continue paying the government’s bills; sequestration now begins in March and must be dealt with before the across-the-board spending cuts take effect; and the stopgap spending bill that currently funds the government will end in March
, setting up another fiscal cliff for Congress and the administration to clear. This next round of negotiations may make the last one look easy. Stay tuned…