Historic Crisis Averted - Deficit Battle to Resume in September
After nearly three months of intense negotiations between the White House and Congress, President Obama signed into law yesterday the Budget Control Act of 2011 (S.365) (the “Act”), a bill that establishes a process for raising the $14.3 trillion statutory debt ceiling by at least $2.1 trillion and results in deficit reductions totaling at least $2.117 trillion over 10 years.
With the Treasury Department’s August 2 deadline for raising the nation’s borrowing capacity looming, President Obama and Congressional leadership in both chambers formulated a last minute compromise on July 31 that succeeded in averting an unprecedented and potentially catastrophic national default that threatened to destabilize both the U.S. economy and global markets.
In a pivotal House vote on Monday evening, 174 Republicans and 95 Democrats rallied to approve the Act by a vote of 269-161. Viewed by many as a test of House Leadership, Speaker John Boehner (R-OH) and Minority Leader Nancy Pelosi (D-CA) were able to muster sufficient votes from their respective caucuses despite deep misgivings from Republicans who called for additional spending cuts and Democrats who called for a combination of spending cuts and revenue increases. On Tuesday, the Senate followed suit by passing the Act by a vote of 74-26, with 19 Republicans, 6 Democrats and 1 Independent voting in opposition.
Overall, President Obama and Congressional Democrats successfully secured debt limit increases large enough to extend through the 2012 elections, while Congressional Republicans were equally successful in preventing deficit reduction by way of revenue increases. However, the Act’s creation of a 12-member Joint Select Committee on Deficit Reduction, tasked with reducing the deficit by at least $1.2 trillion through fiscal 2021 virtually guarantees that a thorny debate over the national debt—particularly as it relates to taxes and entitlement spending—will resume quickly when Congress returns from its month-long August recess.
Below is a summary of the key provisions of the bill:
Debt Ceiling Increase
The Act creates a two-step process for increasing the $14.3 trillion statutory debt ceiling by an amount between $2.1 trillion and $2.4 trillion. Upon passage, the Act provides a $900 billion debt ceiling increase—$400 billion is immediate and an additional $500 billion is subject to a congressional joint resolution of disapproval that can be vetoed by the President—that will provide sufficient government borrowing authority through 2011.
For the second raise of the debt ceiling—expected in early 2012—the size of the increase would be contingent on whether Congress approves recommendations made by the newly created Joint Select Committee on Deficit Reduction. If Congress approves recommendations that enact savings of $1.5 trillion, or alternatively, if Congress approves a Balanced Budget Amendment to the U.S. Constitution and sends it to the states for ratification, then the debt ceiling would be increased by $1.5 trillion. However, if Congress enacts savings less than $1.5 trillion or no savings, the second debt limit increase would be $1.2 trillion, which would also be subject to a joint resolution of disapproval that could be vetoed by the President.
Spending Cuts
The legislation cuts more spending than it increases in the debt limit. In order to achieve an immediate reduction in the deficit, statutory caps will be placed on discretionary appropriations for fiscal years 2012 through 2021. According to the Congressional Budget Office, these savings would amount to $917 billion over 10 years, starting with a $25 billion reduction in fiscal year 2012 and a $47 billion reduction in fiscal year 2013.
The overall discretionary spending cap for fiscal 2012 would be $1.043 trillion, $6 billion less than fiscal 2011 levels. In order to avoid sacrificing domestic spending on behalf of more security spending, a “firewall” would be erected between security and non-security accounts for both fiscal years 2012 and 2013, essentially creating two separate spending caps for security and non-security spending. National security spending, which would include Pentagon, State Department, Department of Homeland Security, military construction, part of the Department of Veterans Affairs and intelligence spending, among others, would be capped at $684 billion in fiscal 2012 and $686 billion in fiscal 2013, compared with $689 billion in fiscal 2011. Non-security spending would be capped at $359 billion in fiscal 2012 and $361 billion in fiscal 2013, compared with $360 billion in fiscal 2011. Essentially, these amounts mean nominal spending would be frozen in fiscal years, 2012 and 2013. This represents a spending “cut” in Washington budget-speak, because it allows less spending than would be anticipated by the “current services” level, which is current year spending plus inflation.
Bipartisan Joint Congressional Committee
For long-term deficit reduction, the Act tasks the 12-member bipartisan Joint Select Committee on Deficit Reduction to develop a proposal to cut the deficit by at least $1.2 trillion over 10 years. All of the federal budget would presumably be on the table, and the committee is likely to look closely at entitlement spending to achieve its deficit reduction goals. The committee is required to report this legislation to Congress by November 23, 2011. Both the House and the Senate must vote the Joint Committee Proposal up or down, without any amendments, by December 23, 2011.
If the Joint Committee fails to produce a proposal containing at least $1.2 trillion in savings, a sequestration process is triggered that would automatically cut spending across the board. Any sequester would be equal to the portion of the $1.2 trillion savings target that was not achieved by Congress. The first automatic cuts would take effect Jan. 2, 2013, and would fall equally on defense and non-defense accounts, including both discretionary spending and some entitlement spending. If the sequestration process is triggered, revised security and non-security categories would be created. The new security spending category would be comprised solely of funding for the Department of Defense, Department of Energy nuclear-weapons related activities, the National Nuclear Security Administration, and the national security activities of several other agencies and would be capped at $546 billion in fiscal 2013 and $556 billion in fiscal 2014. All other non-security funding—including military construction, Veterans Affairs and Homeland Security funding—would be capped at $501 billion in fiscal 2013 and $510 billion in fiscal 2014.
Please note that the programs contained in the “security” and “non-security” categories under sequestration do not correspond exactly to the programs contained in each category under the immediate spending cuts described above. When one examines the total annual spending though, it becomes clear that for each year nominal spending will be increased. But because in each year the totals fall farther and farther behind the “current services” levels, the amount of deficit reduction achieved each year grows. As with the immediate cuts, the sequestration process essentially keeps spending flat.
Under sequestration, Medicare will face limited cuts, but Social Security, Medicaid, veterans and civil and military pay, funding for the wars in Iraq and Afghanistan and overseas contingency operations will be excluded entirely. The arbitrary nature of the sequestration process appears intentionally designed to incentivize Congressional action on the Joint Committee’s recommendations.
Taxes
Congressional Republicans were successful in preventing any immediate revenue increases within the Act. Although House Republicans, in particular, remain unified in their opposition to increasing revenues in the short-term, the jurisdiction of the Joint Select Committee on Deficit Reduction is intentionally broad, leaving room for proposals to increase revenues, likely by way of comprehensive tax reform.
Balanced Budget Amendment
The Act requires both the House and Senate to hold votes by the end of 2011 on a Balanced Budget Amendment to the U.S. Constitution. The inclusion of the amendment language was intended to satisfy the demands of House conservatives, who successfully included an even stronger provision into a previously-passed House plan that would make any second debt ceiling increase contingent on passage of the amendment.
