Monday, August 01, 2011

Summarizing and Understanding the Budget Control Act 2011

Keith Hennessey has it covered for you here. This is the first of three helping people to understand the debt deal. Check out all three.

Here are some excerpts:
Debt limit

The debt limit will be increased by $2.1 T no matter what Congress does.
The debt limit can be increased up to an additional $300 B depending on what Congress does on deficit reduction and a Balanced Budget Amendment (BBA).
The debt limit increase will happen in three steps: $400 B immediately, then +$500 B, then the remainder after Congress tries to enact further deficit reduction and pass a BBA.
Assuming the economy doesn’t go into the tank, this should eliminate the risk of another cash flow crisis for about 18 months, into early 2013. (No, it was never a “default” crisis.)

Spending cuts, tax increases, and deficit reduction

Whether or not Congress successfully enacts another deficit reduction law in the fall, the total deficit reduction will exceed the debt limit increase available to the President. If Congress fails this fall, some of that deficit reduction will happen through automatically triggered spending cuts.
As soon as the Budget Control Act becomes law, discretionary spending (aka annual appropriations) will be cut and capped, with projected savings of $917 B over 10 years, more than the initial $900 B of debt limit increase allowed the President. This is measured relative to a traditional inflation baseline for discretionary spending, without using the “Iraq/Afghanistan war baseline gimmick.”
In addition to these immediately enacted spending cuts from the cut and spending caps, a complex process will lead to additional deficit reduction of $1.2 – $1.5 T (or in theory more) over the next 10 years. That additional deficit reduction will result either from a new law enacted by the end of 2011, or from automatically triggered spending cuts written into the Budget Control Act (or from a combination of the two). The last leg of the President’s debt limit increase is tied to this additional deficit reduction.
How that additional deficit reduction is achieved is uncertain:
The bill creates a new Joint Committee of 12 Members of Congress (6 R, 6 D), whose goal is to produce a bill that would reduce the deficit by $1.5 T over 10 years. If 7 or more Members of that Committee approve a bill by November 23rd, it is guaranteed a straight up-or-down vote in the House and Senate by December 23rd. No amendments and no Senate filibuster are allowed of this bill. It’s take-it-or-leave-it to everyone.
If this new Joint Committee legislative process fails to result in a law, then there will be no tax increases and there will be triggered $1.2 T of across-the-board spending cuts in discretionary spending, Medicare, farm subsidies, and a few smaller entitlements. These triggered spending cuts would hit defense more deeply than other types of spending.
The additional deficit reduction could include tax increases, but only if:
7 of 12 Members of a new Joint Committee of Congress agree to raise taxes, including at least one Republican Member of the Committee;
and a majority of the House and Senate vote for the Committee’s recommendations;
and the President signs the bill into law.
For more details on tax increases in the Joint Committee process, please see my other two posts today.

Assuming the language has been tightly drafted enough, this process should result in $1.2 T – $1.5 T of additional deficit reduction no matter what. There are four possible outcomes from this process to produce that deficit reduction:

across-the-board spending cuts automatically happen in defense and non-defense discretionary spending (deeper in defense), Medicare, farm and housing subsidies and a few smaller entitlements; or
a bill becomes law that cuts spending only, with the makeup of the spending cuts determined entirely by the new Joint Committee (and including any spending the Committee wants); or
a bill that cuts spending and raises taxes comes out of the Joint Committee and becomes law; or
some combination of (1) with (2) or (3).

Go check out his excellent work. It might help us make sense of things.