What Is Sequestration?

What Is Sequestration?

Sequestration is a term adopted by Congress to describe a backup fiscal policy mechanism to enforce budgetary discipline over agreed-upon deficit reduction targets established under the 2011 Budget Control Act (BCA).

Sequestration, or "the sequester," is a procedure by which planned spending increases are moderated by pre-specified percentages if Congress fails to agree to a budget that meets agreed-upon caps on spending increases. These caps are set by the BCA before a specified date each year over the term of the sequester.

It is important to note that though sequestration is often referred to as a program of “spending cuts,” it imposes no actual reductions to spending but only limits spending to smaller increases than some politicians, special interests, and Congress members would prefer.

Key Takeaways

  • Sequestration is a U.S. federal fiscal limitation policy put into place under the 2011 Budget Control Act (BCA). 
  • The BCA set targets for deficit reduction and caps on the increase in federal spending in each year from 2013 to 2021.
  • If spending exceeds these caps, the government is supposed to limit planned increases in spending by a percentage determined as laid out by the law. 
  • In practice, most federal spending is exempt or otherwise not subject to limits by sequestration as Congress continually raises its spending caps and legally exempts new categories of spending. 
  • Medicare had sequestration exemptions limited to 2% maximum proposed cuts.

Understanding Sequestration

Under the Budget Control Act of 2011 (BCA), Congress agreed to a series of caps on increased spending for each year through 2021. Congress passed the BCA to help resolve the debt ceiling crisis of 2011. This act increased the United States debt ceiling and established a 12-member committee (the Joint Select Committee on Deficit Reduction, or the “super committee”) to reduce the deficit by an additional $1.2 trillion to $1.5 trillion over the next decade.

Part of the BCA, also known as the debt ceiling compromise, called for sequestration if the super committee failed to reach an agreement, generating automatic spending increase limits for each of the nine years (fiscal years 2013–2021).

This committee was unable to reach an agreement, and the American Taxpayer Relief Act pushed the budget cuts back until March 1, 2013. With Congress still unable to reach an agreement, sequestration was approved and went into effect on March 4, 2013.

Sequestration Reductions

With the sequester in place, as actual budget spending is set by Congress in each successive year, the BCA directs the Congressional Budget Office (CBO) to assess whether these caps will be exceeded by the planned spending increases. If they are, then the Office of Management and Budget (OMB) determines whether the law requires that sequestration will be imposed and how much the sequestered reduction in planned spending increases will be. 

These sequester percentage reductions in planned spending increases determined by the OMB, in theory, would apply across the board to virtually all federal discretionary and mandatory spending. However, along with passing annual budgets each year, Congress has also raised the caps on increases in discretionary spending for each year to accommodate higher spending increases, so that federal discretionary spending has never actually been subject to sequestration. 

Exemptions on Mandatory Spending

Although the spending increase limits are “across the board,” most mandatory spending is exempt from spending caps and sequestration. This includes Social Security, veterans’ programs, Medicaid, and other low-income assistance programs like Temporary Assistance for Needy Families (TANF) and the Supplemental Nutritional Assistance Program (SNAP), and net interest on the federal debt.

In recent years, Congress has also acted to expand the categories of spending that are exempt. "Specifically, the budget authority that is designated as an emergency requirement or provided for overseas contingency operations, such as military activities in Afghanistan, leads to an increase in the caps, as does budget authority provided for some types of disaster relief or certain program integrity initiatives."

Some mandatory federal spending has been subject to the sequester spending increase limits over the years. For these programs, planned and projected spending increases are compared to the statutory spending caps, and if they exceed the limits, then the calculated reduction percentages are applied to limit the increase in spending.

In everyday terms, for mandatory spending subject to caps and sequestration, this process is analogous to a family agreeing they will increase their household spending by $100 next month, then jointly make plans to increase spending by $200 next month, then reducing that increase by 50% so that they end up only actually spending an additional $100, and then calling this a spending cut.

Is Sequestration Still in Effect Today?

The Budget Control Act required that $1.2 trillion in federal spending be cut over nine years. So, unless Congress changes the law, federal spending will be subject to sequestration until the year 2022.

When Was Sequestration Passed?

Sequestration was part of the 2011 Budget Control Act and became effective in 2013.

What Is the 2% Medicare Sequester?

Under the BCA, federal Medicare benefit payments and Medicare Integrity Program spending could not be cut by more than 2%. On Dec. 10, 2021, President Biden signed the “Protecting Medicare and American Farmers from Sequester Cuts Act,” which phased in the Medicare sequester cuts that had been paused during the COVID-19 Public Health Emergency (PHE), starting April 1, 2022. From April 1, through June 30, 2022, the cut is 1%. and the cut will return to 2% on July 1, 2022.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. U.S. House of Representatives Committee on the Budget. "Summary of the Budget Control Act of 2011."

  2. U.S. Government Accountability Office. "March 1 Joint Committee Sequestration for Fiscal Year 2013."

  3. Congressional Budget Office. "Final Sequestration Report for Fiscal Year 2018."

  4. American Society of Clinical Oncology. "Sequestration Cuts Return to 2% on July 1, 2022."

Open a New Bank Account
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.