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Under the Balanced Budget and Emergency Deficit Control Act of 1985 (as amended by the Budget Enforcement Act of 1997), the Congressional Budget Office (CBO) issues a sequestration update report each year on August 15. This report provides current estimates of discretionary spending and the limits on that spending for 2002 and 2003. It also updates the pay-as-you-go (PAYGO) scorecard for legislation enacted through August 14, 2002, that affects mandatory spending or revenues.

The Deficit Control Act has two mechanisms to govern federal spending, both enforced through sequestration (a cancellation of budgetary resources). Section 251, which expires on September 30, 2002, sets limits on the spending provided through the annual appropriations process. If estimated discretionary spending exceeds those limits, the act prescribes a sequestration to eliminate the excess. Section 252 established a PAYGO scorecard to record the projected five-year budgetary effects of each piece of legislation that affects mandatory spending or revenues. If such legislation is estimated to result in a net increase in the deficit or decrease in the surplus, the act calls for reductions in mandatory programs (that are not otherwise exempt) sufficient to offset that change. Although legislation enacted after September 30 will no longer be recorded on the PAYGO scorecard, the possibility of a PAYGO sequestration will continue through 2006 as a result of legislation enacted before the end of fiscal year 2002.

The limits on discretionary spending apply to four categories for 2002: overall discretionary, highway, mass transit, and conservation. CBO estimates that spending from appropriations enacted to date is within the limits. Limits for the two transportation categories continue through 2003, and caps for conservation spending extend through 2006. However, when section 251 expires, those caps will become moot.

Legislation affecting mandatory spending or revenues enacted during the current session of Congress has increased the projected deficits for 2002 and 2003 by $52.7 billion and $53.5 billion, respectively. The largest contributor to those amounts is the Job Creation and Worker Assistance Act of 2002 (Public Law 107-147), which accounts for an estimated $50.9 billion this year and $42.9 billion next year. That law, also known as the economic stimulus package, was designated an emergency requirement, thereby excluding it from the PAYGO scorecard. To avoid a PAYGO sequestration, the Congress would need to eliminate or offset the balances for 2002 and 2003--a total of $123.1 billion (mostly from legislation enacted in previous years)--before it adjourns this year.
 

Discretionary Sequestration Report

On February 1, 2002, CBO published its preview sequestration report for fiscal year 2003; shortly thereafter, the Office of Management and Budget (OMB) issued its equivalent report. Because OMB's estimates are the official basis for determining whether a sequestration is required, CBO has changed the caps in this report to match the figures in OMB's preview report. In addition, CBO has raised certain caps for 2002 to include emergency funding enacted since January.

Changes Made to the Discretionary Spending Limits on the Basis of OMB's Report

For the overall discretionary and transportation categories, both agencies had the same estimates of the caps for 2002.⁽¹⁾ For the conservation category, however, OMB's estimates of the limits on both budget authority and outlays were lower than CBO's were, by $25 million and $4 million, respectively (see Table 1).
 

For the highway category in 2003, OMB's estimate of the cap was $2,053 million below CBO's (see Table 2). Almost all of that discrepancy stems from the slower rate of spending that OMB estimates for the Federal-Aid Highway program.
 

In its preview report, CBO increased the limit on mass transit spending by $221 million. (CBO believes that amount is the maximum adjustment allowed under the Deficit Control Act.)⁽²⁾ In its equivalent report, OMB estimated that adjustment to be $499 million--$278 million more than CBO's increase. Because OMB's estimates are binding for sequestration purposes, CBO has made the same adjustment.

Adjustments to Reflect Recent Legislation

The 2002 Supplemental Appropriations Act for Further Recovery From and Response to Terrorist Attacks on the United States (P.L. 107-206) contains $24.7 billion in emergency appropriations.⁽³⁾ Because the Deficit Control Act requires that the caps be increased to accommodate emergency spending, CBO has raised its estimate of the limit on budget authority for 2002 by that amount. About half of those appropriations is for defense; the other half is for homeland security, expenses in New York related to the September 11 attacks, and other purposes. CBO estimates that P.L. 107-206 will result in emergency outlays of $6.8 billion in 2002 and has raised the outlay cap by that amount.⁽⁴⁾

Section 1402 of the supplemental appropriation act specified that certain adjustments that were made previously to the highway cap for 2003 should be removed. As a result, that limit has been boosted to $29,100 million.

Compliance with the Discretionary Spending Limits for 2002

As estimated by CBO for purposes of the Deficit Control Act, spending for the overall discretionary category is $495 million below the limit on budget authority and $3,323 million below the limit on outlays (see Table 3). Spending in the other categories is equal to or slightly below their respective limits. Therefore, in the absence of further legislative action, no discretionary sequestration will be required for 2002.
 

Pay-As-You-Go Sequestration Report

Both CBO and OMB estimate the budgetary effects of legislation that affects mandatory spending or revenues. But as with the discretionary spending caps, OMB's estimates determine whether a sequestration is necessary. CBO has therefore adopted the PAYGO balances shown in OMB's sequestration preview report as its starting point for this report (see Table 4).
 

Legislation enacted at the end of the last session of Congress instructed OMB to change the PAYGO balance for 2002 to zero. For 2003, OMB estimated that past legislation has increased the deficit by $110.7 billion. Of the legislation enacted during the current session of Congress, the largest impact on mandatory spending and revenues resulted from the economic stimulus package, which increased projected deficits through 2005. But lawmakers specified that the legislation was for emergency purposes and thus was not to be counted on the PAYGO scorecard. The Farm Security and Rural Investment Act (P.L. 107-171), which was not declared emergency legislation, has also increased projected deficits--by an estimated $1.6 billion this year and $8.4 billion next year. Other legislation has affected the PAYGO balances to a lesser extent, adding $0.3 billion and $2.2 billion, respectively, to the balances for 2002 and 2003.

Under the Deficit Control Act, the net costs for 2002 and 2003 are combined to determine the magnitude of a PAYGO sequestration for 2003; by CBO's estimate, that total comes to $123.1 billion. Unless lawmakers take action to eliminate or offset that balance, a PAYGO sequestration will be required at the end of this session of Congress. However, the Deficit Control Act exempts numerous programs from sequestration (including Social Security, Medicaid, and Supplemental Security Income) and limits the amount that may be sequestered from others (such as Medicare and the Commodity Credit Corporation). Consequently, the total amount of new outlays for mandatory programs that could be sequestered in 2003 is less than $60 billion.⁽⁵⁾

1. The caps for the overall discretionary and conservation categories cover both budget authority and outlays; limits on transportation spending apply only to outlays. Obligation limitations (which do not count as budget authority) that are set in appropriation acts control all of the spending in the highway category. A combination of appropriations and obligation limitations controls spending for mass transit.

2. See section 251(b)(1)(C)(ii) of the Deficit Control Act.

3. Public Law 107-206 included an additional $5.1 billion in budget authority that was declared contingent emergency funding by the Congress. That funding would become available only if the President also declared that all of those appropriations were emergency requirements (otherwise, none of the funding would become available). On August 13, the President announced that he would not declare those appropriations an emergency requirement, thereby eliminating that $5.1 billion in budget authority.

4. The budget authority and outlays for P.L. 107-206 reflect CBO's estimate for purposes of the Deficit Control Act.

5. The three largest programs that could be fully sequestered are the refundable portion of the child tax credit (about $5.6 billion), the Universal Service Fund (roughly $5.6 billion), and the State Children's Health Insurance Program (approximately $4.5 billion).