DC Digest - August 2, 2011: Congressional Debt Ceiling and Deficit Reduction

 

 

PRESIDENT OBAMA SIGNS BUDGET CONTROL ACT OF 2011

After months of intense deficit reduction negotiations, Congress passed the Budget Control Act of 2011 just hours before the Aug. 2 debt ceiling deadline. The House passed the bill with a 269-to-161 vote, the Senate passed it 74-26, and President Obama signed the deal this afternoon.

The package represents a bipartisan compromise between congressional leaders that will reduce the nation's debt through a two-stage process, while simultaneously raising the debt limit so that the U.S. does not default on its current obligations.  The agreement also includes a new version of sequestration – across-the-board spending cuts – established to impose discipline.

STAGE ONE DEBT CEILING INCREASE
Under the agreement, the President may raise the debt ceiling by $900 billion immediately.  Of that amount, $400 billion goes into effect now.  The remaining $500 billion increase is effective at the end of 2011.  Congress may pass a resolution disapproving it any time between now and then, but such a resolution is subject to a Presidential veto.  A vote of disapproval would still permit the president to raise the debt limit but also allow members of Congress to go on record as disapproving the measure.

STAGE ONE DEFICIT REDUCTION
The agreement establishes caps on discretionary spending from FY12 to FY21.  There are separate caps for security and non-security spending, with firewalls between the two areas, for FY12 and FY13.  The agreement includes spending by the Departments of Defense, State, Veterans Affairs, and Homeland Security, as well as intelligence and foreign aid spending.  From FY14 on, one overall cap would apply to total discretionary spending.  The caps would not apply to spending for the wars in Afghanistan and Iraq.  The agreement also permits adjustments to the caps each fiscal year for designated emergency requirements and disaster relief.  With the effects of inflation, the cap is estimated to cut spending by $917 billion.  In FY12, the overall limit on discretionary spending, $1.043 trillion, is actually $24 billion higher than the amount included in the House-passed budget resolution (H Con Res 34).

The agreement’s budget authority (BA) caps are as follows:

  • FY12 $1.043 trillion – Security $684 billion, Non-security $359 billion
  • FY13 $1.047 trillion – Security $686 billion, Non-security $361 billion
  • FY14 $1.066 trillion
  • FY15 $1.086 trillion
  • FY16 $1.107 trillion
  • FY17 $1.131 trillion
  • FY18 $1.156 trillion
  • FY19 $1.182 trillion
  • FY20 $1.208 trillion
  • FY21 $1.234 trillion


STAGE TWO DEBT CEILING INCREASE
Under the agreement, the President may raise the debt ceiling up to an additional $1.5 trillion at the end of 2011 if Congress approves a package of equivalent deficit reduction measures, to be developed by a special joint Congressional committee (see below).  Even if Congress does not approve such legislation, the President may increase the debt ceiling by $1.2 trillion, but this is to be accompanied by an equivalent across-the-board cut in mandatory and discretionary spending, with certain exceptions, to take effect in FY13 (see below).  Also, Congress must vote on a constitutional amendment to require a balanced federal budget.  Congress need not pass the amendment, although passage would obviate the need for the second-stage spending cuts.  The bottom line is that the legislation ensures that Congress will not need to take another meaningful vote on the debt ceiling before the 2012 election.

STAGE TWO DEFICIT REDUCTION
The agreement establishes a special joint 12-member Congressional committee, with three Democrats and three Republicans from each chamber, all to be appointed by Congressional leaders.  The current goal is to have the members of the Joint Committee appointed by mid-August.

The committee is charged with developing a package of $1.5 trillion in deficit reduction measures by Thanksgiving, 2011.  These could include measures to produce additional revenues, but there is no requirement for additional revenues.  Congress is to consider the legislation on up-or-down votes under expedited procedures specified in the agreement.  If the legislation is approved by December 23, 2011, the debt limit may be raised by an equivalent amount, as noted above. 

If Congress does not approve the legislation, an across-the-board sequester of $1.2 trillion from FY13-FY21 is automatically implemented.  Social Security, Medicaid, veterans’ compensation, and military pay are exempted.  Medicare is not exempted, although any cuts are limited and apply to providers only.  All of the cuts would be divided evenly between defense and non-defense spending.  Non-defense spending cuts would be allocated proportionally between non-exempt mandatory spending and discretionary spending.  Thus nondefense discretionary spending would face a modest reduction compared to defense discretionary spending. Only a handful of programs - including the Pell Grant program - would be exempt from these cuts.

WHAT IT MEANS FOR HIGHER EDUCATION – STUDENT AID
The package contains three main provisions related to student aid:
•    Additional mandatory funding for the Pell Grant program for fiscal years (FY) 2012 and 2013
•    Elimination of the in-school loan interest subsidy for graduate and professional students
•    Elimination of Direct Loan repayment incentives

The legislation provides $17 billion in additional funds to help fill the gap in funding for Pell Grants, $10 billion in FY2012 and $7 billion in FY2013.  This leaves appropriators $1 billion to make up this year to protect the maximum Pell grant at $5,550. 

While very much welcome, the funding in the agreement is paid for in part by the elimination of the in-school interest subsidy for most graduate student participants in the federal student loan program.  The similar subsidy for undergraduate borrowers is untouched.

The loss of the subsidy for graduate students is unfortunate, and the university community opposed this measure.  However, the writing was on the wall when it was proposed by the Obama Administration and then included in all of the subsequent major debt ceiling plans.

IN SUMMARY - Basics of the Debt Ceiling and Deficit Reduction Deal

  • Increases debt ceiling by $900 billion immediately, to avoid default.
  • Cuts spending now by $1 trillion.
  • President can request an additional $1.2 - $1.5 trillion increase in early 2012.
  • Sets discretionary spending caps at $1.043 trillion for FY 2012. (That is $24 billion more than the House Budget Resolution, $7 billion less than last year.)
  • Sets discretionary spending caps at $1.047 trillion for FY 2013.
  • Creates a firewall between defense and non-defense spending.
  • Creates Joint Congressional Special Committee to consider $1.5 trillion in additional cuts to be reported out by Thanksgiving, and voted up or down before Christmas this year. (An additional $300 billion in savings will be realized through lower interest payments.)
  • If deficit reduction is less than $1.2 trillion, an automatic across-the-board cut will be applied equally to defense and non-defense spending, to make up the difference.
  • Requires House and Senate to vote on the Constitutional Balanced Budget Amendment between October 1 and December 31, 2011.
  • Amends Congressional Budget Act of 1974 for budget enforcement procedures.