CHN: The Debt Crisis is Averted: What Happens Next?

On August 2, President Obama signed into law the Budget Control Act of 2011.  The last-minute agreement by Congress allowed for increased federal authority to borrow, thereby narrowly avoiding a potentially disastrous default on federal obligations.  The price of increasing federal borrowing authority was a multi-step pathway to a minimum of $2.1 trillion in deficit reduction over the next decade.  Perhaps the greater price was in forcing Washington’s focus away from doing something about the alarmingly weak economy.
Instead of developing strategies to promote job creation and to extend protections for the jobless, the Budget Control Act will cap and cut spending on appropriations for housing and community development, education and training, infrastructure repair, green jobs, public health, medical research, early childhood education, and much, much more.  By the end of this year, additional savings must be made, which can come from programs like Medicare, Medicaid, and other mandatory programs that do not need annual appropriations.  Although increased revenues can be a part of the eventual deficit reduction package, the first steps will be spending cuts, with significant political roadblocks to overcome if revenues are to be included.

The basic outline of the legislation:

  • Caps on annual appropriations from FY 2012 – FY 2021, with specific caps for “security” and “non-security” spending required in the first two years.  The total net savings over the decade is estimated by the Congressional Budget Office (CBO) as $917 billion, with $156 billion of that coming from reduced interest payments on the debt because of the spending reductions.
  • Further savings of between $1.2 trillion – $1.5 trillion through FY 2021, proposed by a “super committee” of 12 representatives and senators, with the House and Senate leaders of both parties selecting three each.  The committee’s real name is the Joint Select Committee on Deficit Reduction.  The Joint Select Committee must make its recommendations by November 23, 2011.  Congress must vote up or down on the Committee’s proposal without amendment.
  • Automatic cuts triggered if the Joint Select Committee’s recommendations are not enacted into law by December 23, 2011 (or if the Committee does not recommend at least $1.2 trillion in savings over 10 years).  If no recommendations emerge from the Committee or if they are not enacted into law, the automatic cuts (known as “sequestration”) must total $1.2 trillion through 2021, with $55 billion a year coming from defense programs and $55 billion a year from non-defense programs.  The non-defense cuts can be applied either to annually appropriated programs or to mandatory ones like Medicaid or Medicare.  (Medicare cuts are limited to provider payments, and cannot exceed 2 percent of Medicare spending.)  But low-income mandatory programs are exempt (included in this category are Medicaid, Temporary Assistance for Needy Families, SNAP/food stamps, SSI, some child care, and refundable tax credits).  The actual cuts do not take place until January 1, 2013, a full year after the trigger is pulled.
  • The federal authority to borrow (aka the “debt ceiling”) is increased– immediately by $400 billion, and in two additional steps for a total increase of between $2.1 trillion and $2.4 trillion.  No additional legislation must be passed by Congress for the debt ceiling to be raised, although Congress could pass “resolutions of disapproval” to prevent further increases beyond the initial $400 billion.  Such resolutions could be vetoed by the President and it is unlikely his veto could be overridden (that would require a two-thirds vote in both House and Senate).  Current estimates are that the full increase would be enough to authorize borrowing until 2013.
  • Votes on a constitutional amendment to balance the budget are required.  Between October 1 and the end December 2011, both houses of Congress must vote on a balanced budget amendment.  It does not have to pass.

The impact on FY 2012

.  The Budget Control Act sets a cap on annual appropriations; in fact, for FYs 2012 and 2013, it sets two caps:  one for “security” programs and another for “non-security.”  Security programs include defense, and also homeland security, veterans services, international programs, certain Department of Energy programs, etc.  Non-security appropriations include education, training, affordable housing, community development, home energy aid, child care and other children’s services, public health, most research and development, environmental protection, consumer and workplace protection, meals on wheels and other services for seniors, mental health and substance abuse treatment, and more.  The total spending cap for FY 2012 is $1.043 trillion. Out of that, $359 billion can be spent on “non-security” programs, plus another $10 billion specifically allotted to ensure there is enough money to cover the rising costs of the Pell Grants college scholarship program.  The full amount for FY 2012 is less than the most current figures for FY 2011 spending, but it is higher than the amount passed by the House for FY 2012.  House appropriators have reported out spending bills assuming these lower levels, but the new cap gives them more room for the bills they have not yet taken up, in particular the large funding areas of Labor-HHS-Education and Transportation-HUD.  The Senate Appropriations subcommittees will report out all their bills based on the Budget Control Act’s $1.043 trillion cap.  Current year spending for these programs is $362 billion.  Advocates will work to secure the highest possible funding levels for human needs programs within the cap set by the new law, but rising need because of the weakening economy is likely to leave growing numbers unserved (or served less well).

If Congress enacts the recommendations of the Joint Select Committee (and the President does not veto the bill), additional cuts and/or revenue increases will take effect in FY 2012.  Additional spending cuts could include mandatory programs such as Medicare, Medicaid, SNAP/food stamps, or Social Security.  While low-income programs like Medicaid are exempt from the automatic cuts, they are not exempt from the recommendations of the Joint Select Committee.  The Joint Committee could also cut more deeply into annual appropriations.  Or, they could reduce the extent of spending cuts by increasing revenues.  As noted above, if Congress and the President cannot agree on legislation coming from the Joint Committee, or if their recommendations do not produce the minimum $1.2 trillion in savings required, the automatic cuts will be put off till 2013.

What is the most likely outcome from the Budget Control Act?  The first round of appropriations cuts is likely to take place, at least in the early years.  Is it also likely that the Joint Select Committee will produce legislation that can pass Congress and be signed by the President?  Many are doubtful, because Republican leaders have vowed not to appoint anyone who would ever agree to increased revenues and the Democrats appointed would probably insist on some increase in revenues.  If this part of the Budget Control Act hits a wall, the automatic cuts triggered will start up at about the same time that the Bush tax cuts are slated to expire (December 2012/January 2013).  The Administration has suggested that the President would veto legislation to continue the upper-income tax cuts, but it seems unlikely Congress will give him bills that separate out the high-end tax cuts from the rest.  Vetoing all the tax cuts (including the very important expansions of the low-income Child Tax Credit and Earned Income Tax Credit) would be difficult, but might be the step needed to force a more favorable negotiation.  That could lead to a package including fair revenues, responsible military and other spending reductions, protections for vulnerable people, and investments in job creation and economic recovery.  Even though such a package would include some increased funding, especially in the early years when the economy is weakest, there could still be net deficit reduction over the ten year period.

December 2012, just after the election, could be a tumultuous time in Lame Duck City.  If Congress has not acted by this time, the mix of expiring tax cuts and upcoming massive military and domestic cuts could lead to a stand-off like the debt crisis we have just experienced.  The country is not likely to benefit.

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