The fiscal cliff deal was not a pretty thing, but it moved the conversation forward. It resolved uncertainty on most of the outstanding tax issues, and we think that it likely helped prevent a tax-hike-induced recession in the United States. That’s part of the deal. Now, we look forward to fixing the other part – spending cuts, or as they call it in Washington, sequestration. The deal hammered out by Congress in the first day of 2013 delayed the automatic spending cuts by two months. So the question is, if they pushed it back once, won’t they just push it again and delay until sometime in 2014?
I don’t think so. I think something is going to happen on the spending cut side. With the new sequestration deadline seemingly on top of the deadline for expansion of the federal debt ceiling, Republicans have some amount of leverage. The problem with delaying the sequestration even to February is the uncertainty that it pushes throughout the federal system. Government agencies can’t set their 2014 plans until they know how much money they’ll have to spend, and they won’t know how much money they’ll have to spend until the Obama Administration releases its official budget. Now, typically, that would happen in February, but with the question of automatic budget cuts outstanding until probably late February or early March, the President’s budget will likely be delayed well beyond that date.
What makes things a bit more complicated is that federal agencies are currently operating under a temporary “continuing resolution” for the 2013 fiscal year. What this means is that there isn’t really even a good baseline to form an estimate on a 2014 budget. I can’t imagine that either the President or Congress will be willing to live with that kind of uncertainty for the remainder of the year. When the Department of Defense starts complaining about budget uncertainty, you can rest assured that the government will listen. Something will probably be decided at the next sequestration deadline. It likely won’t be spending cuts to the extent that are needed, but something will probably be decided.