The Budget Control Act of 2011

The New Debt Deal

Date: August 2, 2011

The Budget Control Act of 2011• Overview

• Terms

• Projections

• Debt Ceiling Increase

• Balanced – Budget Amendment

• Spending Cuts – First Round

• Spending Cuts – Second Round

• Enforcement Triggers

• Entitlement Cuts and Taxes

• Conclusion

Overview

• Debate centers around the amount of increase of the debt ceiling and a dollar for dollar decrease in the deficit

• Sticking point was how to lower the deficit—by spending cuts, by increasing tax revenues or a combination of both

• The front end of this plan lowers the deficit by spending cuts.

• The second part of the plan allows for a combination of taxes and spending cuts. Up to a super committee of 12 to decide

Terms• Security spending – includes spending on Department of

Defense, Homeland Security, Veteran’s Affairs, Intelligence community, International Affairs

• Non-security spending – all other types of spending not related to security. Does not include Social Security, Medicare, or Medicaid

• Discretionary spending – spending through appropriations bills.

• Mandatory spending – spending on certain programs which Congress must spend under current law

• CBO – Congressional Budget Office– Non partisan office funded by Congress in charge of analyzing

and projecting the economic implications of legislative initiatives and budgets

Projections

• Debt ceiling will need to be raised $2.1 – 2.4 trillion by 2013– Will be raised $400 billion automatically in Fall 2011– Will be raised an extra $500 billion before December 31, 2011 unless

Congress disapproves– Will be raised $1.2 – 1.5 trillion at end of 2011– Raises in debt ceiling will be matched dollar for dollar with spending

cuts and possible revenue increases

• Two ways to raise debt ceiling to meet $2.1 – 2.4 trillion request: constitutional amendment or Congressional approval

• Two ways to cut spending to meet dollar for dollar match: acceptance of supercommittee’s savings recommendation or across the board budget cuts

• CBO estimates the Budget Control Act will save at least $2.1 trillion from 2012 – 2021

Debt Ceiling Increase

• Two Step Process to increase $14.3 trillion debt ceiling by $2.1 – 2.4 trillion over two years– First step: $900 billion increase in debt ceiling

• Treasury can access $400 billion in borrowing immediately• Debt ceiling would automatically raise by $500 billion after

December 31, 2011 unless Congress passes a resolution of disapproval - requires a 2/3 vote

– Second step: Remaining $1.2 – 1.5 trillion anticipated increase in debt ceiling through 2012• Actual amount of increase depends on actions taken by Congress

this Fall• Debt ceiling will automatically increase $1.5 trillion if a balanced

budget amendment is passed by 2/3 of Congress

Under Compromise

Balanced-Budget Amendment

• Plan requires both House and Senate to vote on a proposed balanced-budget amendment (joint resolution) to the Constitution by the end of 2011

• If passed by 2/3 of Congress, debt ceiling is automatically raised by another $1.5 trillion

• To become Constitutional Amendment, ¾ states must ratify it

Spending Cuts – First Round• These match the debt ceiling increases dollar for dollar

• Immediate spending cuts of about $917 billion over 10 years

– Set discretionary spending caps over which Congress cannot spend

– Of the $917 billion, 38 % ($350 billion) cut from security over 10 years

– Firewall between security and non-security spending

• Can’t mix and match funds – can’t take security from a non-security program fund

• Does not assume any savings from winding down Iraq and Afghanistan wars

Spending Cuts – Second Round

• Special joint committee of 12 to propose further cuts/tax increases of $1.5 trillion, the remaining amount needed to balance the $2.1 – 2.4 trillion debt ceiling increase

– President Obama will appoint 3 Republicans and 3 Democrats from both the House and Senate

– For recommendation to pass, it needs equally divided support from 1/3 of the committee

– Recommendation subject to simple majority vote without amendment

– Each chamber must vote before December 23, 2011

By December 23, 2011

Spending Cuts – Second Round

• Mandate and Goal of Special Committee– Mandate: Make recommendations to meaningfully

improve short- and long-term fiscal imbalance– Goal: Cut deficit to match debt ceiling increases dollar for

dollar• Recommendations should cut deficit $1.5 trillion by 2021

(over 10 years)

• Will look at cuts to Medicare, farm subsidies, educational assistance, and retirement benefits for federal workers

• If Congress does not accept the recommendations, or the committee cannot recommend a plan to save at least $1.2 trillion over 10 years, it would trigger the enforcement mechanism

Enforcement Trigger for Panel’s Recommendations

• Similar to 1985 Gramm-Rudman anti-deficit law

– Goal of law was to cut the budget deficit in 1985, which at the time was the largest in history

– Enacted automatic spending cuts (called sequesters) if the deficit exceeded spending targets

– Produced the first balanced federal budget in a quarter of a century

Details of Enforcement Trigger for Panel’s Recommendations

• Goal is to come up with 1.5 trillion in savings. If recommendations do not produce at least $1.2 trillion in savings over 10 years…– Automatic across-the-board cuts would be enacted to reconcile the

difference to $1.2 trillion in savings, split 50/50 between security and non-security programs (about $500 billion over ten years for each category)

– Affected non-security programs: farm price supports, Social Services block grants, mineral leasing payments to states, other smaller spending programs

– Exempt non-security programs: Social Security, Medicaid– Medicare cuts

• Maximum payment cut of 2% of Medicare outlays to Medicare providers. (A cut of about $14 billion)

• Would only affect payment to providers, not beneficiaries

Entitlement Cuts and Taxes • Supercommittee is likely to look closely at entitlement

spending to reach its goal of $1.5 trillion in savings• Plan does not include any immediate increase in

revenue, but committee may consider several forms of revenue increases – Restructuring of tax code– Elimination of tax breaks– Allow Bush tax cuts for high earners to expire in 2013

• One exception to cuts, however: Pell Grants have increased from $3.1 billion to $13.1 billion; an increase of 10 billion but cut direct Stafford loans for graduate and professional students

Conclusion

• Actions by the Congress– House passed the Budget Control Act of 2011 on

August 1, 2011 with a 269 – 161 vote• Yea: 174 Republicans, 95 Democrats

• Nay: 66 Republicans, 95 Democrats

– Senate passed the debt deal on August 2, 2011 with a 74 – 26 vote• Yea: 28 Republicans, 45 Democrats

• Nay: 19 Republicans, 6 Democrats, 1 Independent

• President Obama signed into legislation on August 2, 2011