Energy and the Federal Budget Sequester

Barring a last-second deal to avert it, the federal government's budget will be cut on Friday by $85 billion for the current fiscal year, which ends in September.  These cuts will be applied across the board to every cabinet department and agency of the federal government, though at different rates for defense and non-defense activities, and with some functions exempted by the legislation that set the sequester in place.  Energy is no exception, and some of the cuts there may seem surprising, given the President's emphasis on promoting new energy sources.  It's worth putting all this into perspective.

Much of the discussion I'm hearing about sequestration, including efforts to replace it with a mix of smaller, more-surgical spending cuts and new tax revenue, seems to miss the bigger picture.  Sequestration was devised by the White House and agreed to by Congress as an intentionally repulsive fallback to the $1.2 trillion of detailed spending reductions that were to have been negotiated in exchange for raising the federal debt ceiling by what ended up being $2.1 trillion--already spent in the meantime.  There were certainly political reasons why that deal focused on spending cuts, rather than a mix of cuts and new revenue.  However, after reviewing the White House's own data on federal revenues and expenditures for the last five years, it would be hard to avoid the conclusion that the US government has a serious spending problem, irrespective of any revenue concerns. 

Specifically, the Office of Management and Budget (OMB) expects combined federal revenue for fiscal year 2013 to come in at $2.9 trillion, or 13% higher than the previous all-time, pre-recession peak in 2007.  Yet 2013 expenditures of $3.8 trillion would be 40% higher than the 2007 level--a trillion dollars more, in fact.  Some of that increase reflects carry-overs from the 2009 stimulus bill, most of which was spent in 2010-12. Even after factoring out expenditures related to the higher unemployment resulting from our weaker economy, federal spending has grown rapidly.

What does sequestration mean for federal energy programs?  Before the cuts were postponed for two months, OMB identified annual reductions totaling $2.4 billion from non-exempted programs within the Department of Energy.  That included cuts of about 8% to the department's science budget, the Office of Energy Efficiency and Renewable Energy (EERE), ARPA-E, the Strategic Petroleum Reserve, innovative technology loan guarantees, and other activities.  Around a billion would be cut from the DOE's nuclear weapons and defense-related work.  Yet when applied to the DOE's 2013 budget request, it appears the department would still receive about a billion dollars more after sequestration than it spent in 2008.

DOE isn't the only place that energy spending would be cut.  I was surprised when I was alerted by a friend in the renewable energy practice of the Akin Gump law firm that Treasury renewable energy grants in lieu of future tax credits would also be subject to sequestration. The federal low-income heating energy subsidy (LIHEAP) would be cut, too, along with the budget for the Bureau of Ocean Energy Management, which administers offshore oil, gas and renewable energy leases. Together they amount to just over $3 billion in reductions from the roughly $44 billion appropriated for energy-related activities this year.

Across-the-board cuts should never be management's first choice for reducing expenses, because they hack away at necessary and useful functions along with the wasteful ones.  However, these cuts are occurring because the administration and Congress couldn't agree on setting priorities for where to cut. After seeing the reactions to the threat of cuts from almost every interest group in America, are we in any position to blame them?  When everything is a priority, nothing is a priority. That's what the sequester reflects, nor is it without precedent.

Because of where I live, some of my relatives, friends and neighbors will feel the direct impact of sequestration.  They have my sympathy. I'm sure it would be little consolation to them to know that  I spent several stretches of my own corporate career under various across-the-board budget cuts, pay freezes, and similar programs that frustrated me, too, because I saw so much muscle cut along with the fat. Parts of the private sector have been through their own versions of sequestration numerous times, some quite recently.  It's never ideal, but sometimes it's the only workable option to rein in spending.

With respect to energy the numbers above suggest that, if given some flexibility in how to allocate cuts on this scale, the government should be able to fund all the core functions of the Department of Energy in promoting energy security and helping to develop new technology, while preserving its key organizational capabilities.  That might not be true of the department's recent efforts in industrial policy. It remains to be seen whether the Congress and White House can agree on providing that kind of flexibility in the execution of a sequestration policy that now looks virtually certain to go into effect this weekend.