A Look At Sequestration: Potential Cuts to Federal R&D In the First Five Years
Sequestration — the large, automatic, across-the-board reductions in federal funding set to begin in January of 2013 — remains a major concern for many inside and outside Washington. The cuts, established in the Budget Control Act (BCA) of 2011, amount to $55 billion less in defense discretionary spending and up to $38 billion less in nondefense discretionary spending. Cuts of this magnitude could no doubt have significant impacts on federal funding of science, research, and innovation. They also come at a time when federal R&D has already declined by 10 percent in real dollars since FY 2010. This brief attempts to illuminate the size of these potential cuts by estimating budget impacts for most key R&D agencies, and the funding ramifications by state, over the next five years. A summary version follows, with tables appended.
And Sequestration Again Is…?
Sequestration was put in place by the BCA in August 2011. This law was meant to reduce discretionary spending, which accounts for about a third of the federal budget, and includes almost all federal R&D. As far as mandatory spending — which makes up the remainder of the budget, and consists mostly of entitlements like Social Security — the BCA leaves it largely untouched, and nor does it affect the tax code, though it’s difficult to envision a real deficit-reduction plan that ignores these latter elements.
In terms of spending, the BCA basically did two things. First, it established caps that will keep federal discretionary spending mostly flat (when accounting for inflation) over the next decade. Alone, these caps amount to about $1 trillion less than had been projected prior to the law’s passage. But it also established additional automatic reductions – the sequestration – which would reduce this spending even further: by about 9.4 percent for defense spending and 8.2 percent for nondefense spending.
The irony is that it was originally intended only as a contingency plan. The BCA established a special Congressional committee to produce what would have been a sweeping deficit reduction plan of well more than $1 trillion. The cuts now known as sequestration were simply meant as a “gun to the head” for this committee. Policymakers expected this committee to succeed, and thus avoid the doomsday sequestration scenario; it didn’t, and so sequestration looms in the absence of a bipartisan plan to avoid it.
What We Did
Read the full brief for the more detailed explanation, but here are the basics. We started out by developing an R&D funding baseline through 2017, under the assumption that federal R&D spending would grow at the rate allowed by the BCA caps mentioned above. This is a pretty safe expectation, as the ratio of federal R&D to discretionary spending has been pretty static over the past few decades. Then, we estimated potential cuts under a couple different scenarios. The first scenario assumes sequestration goes forth in a balanced fashion: equal cuts to defense and nondefense, as the law is currently written. We drew on previous analyses of the BCA by the Congressional Budget Office (CBO) and the White House’s Office of Management and Budget (OMB) to develop these estimates.
However, many have proposed alternative plans that would shift at least some of the spending-reduction burden onto nondefense and away from defense (and given the tenor of the debate, there are many who would shift the entire burden). So, in the second scenario we looked at what might happen should this shift happen in its entirety, with the defense cuts redirected onto nondefense spending. The aforementioned analyses by OMB and CBO were helpful here too.
Lastly, we used state-by-state funding data from the National Science Foundation (NSF) to determine how a balanced sequestration may impact individual states.
What We Found
Again, see the full brief for more details, but here are the basic results. In both scenarios, total R&D could be cut by at least $50 billion below the baseline over five years. If sequestration is balanced (see below), the total cuts over five years would be somewhat higher but more evenly distributed. R&D programs on the defense side could be cut by 9.1 percent over five years, while nondefense programs would receive 7.6 percent cuts (they would be larger in the first year and decline thereafter). At the agency level, the National Institutes of Health (NIH) could receive a cut of $11.3 billion over five years, averaging $2.3 billion less per year for research. The Department of Defense (DOD) could average $6.7 billion less for R&D per year, while NSF could receive $2.1 billion less over five years. Total cuts through 2017 would amount to $57.5 billion. The resulting R&D budgets at most agencies would be lower than they’ve been in several years (see charts at bottom).
The nondefense-only scenario would be far tougher for most science agencies, with $50.8 billion in cuts to nondefense R&D funding over five years (see table below). This is more than twice the cuts we might expect under a balanced sequestration. Should these larger cuts take place, it would basically mean a cut of 17.5 percent per agency over the next five years, except for Veterans Affairs, which is exempt. For NIH, this could amount to $26.1 billion less for research, or an average of $5.2 billion less per year. The Department of Energy’s (DOE) Office of Science could lose $3.9 billion total for research, or $775.9 million per year; NSF could lose $4.9 billion, or $976.0 million per year. For many agencies, cuts of this magnitude would reduce their R&D budgets to levels not seen in over a decade. NASA, for one, hasn’t seen its budget at these potential levels since the 1980s.
One of the frustrating things about these cuts is that we won’t really know how the agencies will adapt to them until they make their plans known. No doubt, agencies will likely cut the numbers of available research grants; for instance, NIH expects to lose over 2,000 grants. Agencies may also modify grant terms to reduce individual grants values but maintain award numbers. Agencies may also reduce or terminate select programs, capital projects, or overhead, or withdraw from current partnerships. Each of these choices will have diverse effects on researchers and contractors depending on the nature of the project. These effects will likely ripple through the broader economy, but the actual impacts are difficult to predict.
What we do know, in any event, is that agencies will have much less to work with when it comes to R&D. We also know that the impacts on researchers will be spread far and wide, geographically speaking. The table at right (click to enlarge) ranks the impacted states by the size of the potential cut under the balanced scenario. California tops the list, given its enormous size and its large university system, with several prominent federal research centers in energy, space technology, and defense. Some states, like Virginia, are particularly heavy in defense R&D, but many, like Maryland, New York, Massachusetts, and Pennsylvania, receive more balanced federal research funding. New Mexico is somewhat unique given the presence of a pair of major labs, Sandia and Los Alamos, making DOE R&D particularly important there. Illinois’ profile is also somewhat unique, given low levels of DOD funding relative to other nondefense agencies like NSF and the presence of Argonne National Laboratory and Fermilab.
What It Means In Context
It would be strange to call this a bad time for cuts of this magnitude, because that would imply that there’s a good time. Nevertheless, there are some negative trends we need to keep in mind as we look at the current situation. As we don’t quite know yet how agencies might adapt, keeping this context in mind is important.
First, federal funding for R&D has been largely flat over the past decade in regular appropriations, and more recently has been on the downswing. In just the past two years, federal nondefense R&D has declined by 5 percent, after a largely stagnant decade. The big exception to the trend, of course, was the infusion of research dollars from the Recovery Act in 2009. While quite large and no doubt helpful, a one-time injection is not a substitute for steady, predictable investment over time, and that stimulus funding has long since dried up. Even the Bowles-Simpson commission has said public investment in R&D is important.
Second, as appropriators have been restrained, federal R&D as a share of the economy has declined. This trend is much more long-term, as federal research investments have generally not kept up with economic growth since the 1970s; if it had, it would be closer to $200 billion, rather than its current level of $140 billion. As public R&D funding has declined in relative scale, private R&D funding has increased. The growth of industrial R&D should be welcomed by those who would have an innovative economy, but it’s also not a perfect substitute for public R&D, which tends to be more long-term, higher-risk, and focused on more fundamental knowledge areas that can have big long-term benefits.
Lastly, while the U.S. prepares to scale back, other nations are ramping up. When measuring by research intensity, or research investment as a percentage of GDP, Asian tigers like South Korea, Taiwan, and China, and select European economies like Germany and Finland, have managed to increase their research intensities substantially — and at a far faster pace than the U.S., albeit from a less research-intensive base. Simply put, sequestration would set the U.S. on a path that runs counter to global research investment trends.