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The Debt Limit Day After — What's Settled, What Isn't

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The Debt Limit Day After — What's Settled, What Isn't

August 3, 2011

As the renewed partisan sniping suggests, the Budget Control Act of 2011 defers at least as many arguments as it settles. The big numbers and bold assertions about what will happen over the next ten years were necessary embellishments to gather enough votes to pass the bill, and avoid the political and market chaos that would have ensued if the government stopped paying some of its bills. But the real work of deficit reduction remains unsettled, meaning months or even years of continued uncertainty over future spending and tax policy, with both parties’ gaze fixed firmly on the next election.

The Debt Limit: Settled Through Election Day

The only thing truly settled by the Budget Control Act is Presidential authority to raise the debt ceiling by $2.1-2.4 trillion, through a convoluted process designed to provide members of Congress the opportunity to cast an ineffective vote against it. After next year’s election, a new law raising the debt limit will be needed, since the government will still have massive borrowing needs, and any new increase will almost certainly be linked to further efforts to reduce future deficits.

Discretionary Spending: 2012 Topline Settled, Details and Future Savings Uncertain

For FY 2012, the President’s February Budget requested $1.122 trillion in non-war appropriations, while the House-passed budget provides $1.019 trillion. This $100+ billion difference threatened to produce another government shutdown drama in October like the one that just ended in April, but the Budget Control Act contains a compromise spending cap of $1.043 trillion in 2012. There will still be fights over specific program allocations and policy riders, but agreement on the topline allows for a more normal appropriations season this year. Similar spending caps are imposed through 2021, and they will be lowered if no further deficit reduction is enacted before January 15, 2012.

It is important to note that while these spending caps are now enshrined in permanent law, future compliance with them is far from guaranteed. Unlike entitlements, discretionary spending must be approved in multiple new laws every year. Passing bills that comply with the caps requires a majority of the House, 60 votes in the Senate (to overcome any potential filibuster) and a Presidential signature. Passing just one bill that violates the caps requires a majority in the House, 60 votes in the Senate (to waive a point of order and overcome a filibuster), and a Presidential signature – exactly the same hurdle as complying with the caps.

By their very nature, discretionary spending caps represent a political agreement, one whose force declines over time as circumstances change and elections bring in new people and shift the balance of political power. The last discretionary cap in law was enacted in 1997 to control spending through 2002. The cap for 2002 was $551 billion in budget authority; the actual amount enacted for 2002 was $735 billion, 33% higher than the cap. There is no reason to believe that, beyond the first couple of years, these new discretionary caps will be any more effective than previous ones. Discretionary caps make it more politically embarrassing to overspend, which is helpful, but they are no magic bullet.

Entitlements and Revenues: Status Quo Likely Prevails through 2012

The Joint Committee created in the bill is charged with finding the next $1.2-1.5 trillion in deficit reduction by Thanksgiving. If they fail, the bill’s enforcement mechanism relies almost entirely on additional discretionary savings to make up the difference. So either there will be a bipartisan agreement on entitlements and revenues this year, or the battle will be deferred until after the election.

Can agreement be reached? The first clue will be when the members of the Joint Committee are chosen, and whether any of them is likely to break with their own party. If not, then the Joint Committee will likely fail to approve anything due to disagreements over taxes.

But what if someone does break ranks and the committee approves something? Democrats say it can’t pass the Senate or will be vetoed if it doesn’t include tax increases to “balance” out entitlement savings. Republicans say there can’t be any tax increases or it won’t pass the House (in fact, the House could vote to prevent such a bill from coming up at all). So despite all the ceremony and trappings, we are no closer to having a significant, bipartisan agreement on deficit reduction than we were before.

Two factors might motivate the parties to come together – expiration of the Bush tax cuts in late 2012, and the deeper spending cuts starting in January 2013 that would be imposed by the Budget Control Act if the Joint Committee fails. Last December, President Obama agreed to a 2-year extension of all the tax cuts as they were about to expire, so Republicans may not perceive a threat here. As for the new enforcement mechanism just put in place, it relies heavily on the same discretionary caps that have failed in the past, so both sides may decide to take their chances on future appropriations bills rather than concede a major principle now.

Deficits and Debt: Unfinished Business for 2013

The most commonly cited target for the deficit reduction needed to stabilize our nation’s finances is $4 trillion over the next ten years. The Budget Control Act is an important step along the path to achieving those savings, but in its first year only 0.5% of that goal is achieved. The remaining 99.5% depends on future enforcement of discretionary caps (one-fourth), a successful Joint Committee plan or its backstop (one-fourth), and nearly $2 trillion of additional savings for which there is no clear path forward.

Steve McMillin is a partner in Hamilton Place Strategies and former Deputy Director of the White House Office of Management and Budget.

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