Monday, November 21, 2011

The Budget Control Act: A Primer

Now that it looks like the Congressional Debt/Deficit/Boondoggle Super Committee is not about to meet its obligations, it is entirely possible that the Budget Control Act of 2011 will kick in.  This bill was enacted on August 2, 2011 in a last ditch effort to conclude August 2011's debt ceiling crisis that was brought about by the intransigence (read childishness) of those elected to represent America in Washington.  The basic purpose of the bill is to ensure that Congress cuts spending by more than they increase the debt limit with no new taxes and with no blank cheque for the President.

Here are some of the high points of the bill, a copy of which is located here in case you are suffering from insomnia:

1.) As we all know, the Joint Select Committee on Deficit Reduction (the so-called Super Committee) must produce debt reduction legislation by November 23, 2011 that would be immune from both amendments (which have already taken place on the bill itself) and filibusters.  The legislation that was to be proposed aimed to cut at least $1.5 trillion over the next 10 years and be passed into law by December 23rd, 2011.

2.) If Congress fails to cut at least $1.2 trillion, it can grant a $1.2 trillion increase in the debt ceiling, however, this will trigger cuts in spending split equally between security and non-security programs.  These cuts would be in an amount equal to the $1.2 trillion less the deficit reductions agreed upon by the Committee.

3.) Congress is to establish a Committee that is charged with reducing the deficit by $1.8 trillion over the 2012 to 2021 period.  I'd suggest that if they are having this much trouble cutting $1.2 trillion, they are NEVER going to cut $1.8 trillion!

3.) Caps on discretionary spending would be established for the period through to 2021.

4.) Procedures would be established that would allow Congress to change the Constitution by adding a balanced budget amendment.

It's really key to note that the bill will not actually reduce the debt, rather, it is hoped that it will slow the rate of debt accrual by reducing the deficit, a rather dodgy proposal at best.  Is it just me or has anyone else noticed that, unlike Mainstreet America and its consumer debt, no one in government ever talks about actually paying back any part of the debt?

It's interesting to see just how petty the whole process has been as reflected in the bill.  Elimination of the subsidized loan program for graduate students by eliminating the interest subsidy on loans would save a massive $8.2 billion between 2012 and 2016 and a total of $18.1 billion between 2012 and 2021.  Hardly a significant saving in light of trillion dollar plus deficits but I guess Congress had to start somewhere and who better to punish than a bunch of graduate students.

The Congressional Budget Office estimates that the bill will result in a $22 billion cut in the 2012 deficit (a very insignificant 1.8 percent of 2011's deficit) and by $915 billion between 2012 and 2021.  Cuts in discretionary spending (spending that is set annually by Congress, for example Armed Forces, FBI, infrastructure etcetera) will total $740 billion and mandatory spending (i.e. Social Security, Medicare, Medicaid, federal retirement programs etcetera) will be reduced by $20 billion.  Most interestingly, reduced interest on the public debt will save the taxpayer $155 billion over the 10 year period, hardly a significant saving when interest on the debt for the past 10 years totalled $3.862 trillion.   If these targets are met, the bill will allow the President of the Day to increase the debt by up to $900 billion.  Basically, it's a case of robbing Peter to pay Paul.  When all adjustments are considered, the CBO estimates that the Budget Control Act will reduce budget deficits by about $1.1 trillion between 2012 and 2021.  To put these numbers into context, the deficit for the past 3 fiscal years alone is just over $4 trillion so you can see that an average deficit reduction of roughly $100 billion annually is laughably and absurdly small.

Americans had better hope that no new wars erupt, that there are no recessions in the next 10 years that give corporations an opportunity to slash the government's corporate tax revenues, that interest rates on the accrued federal debt remain at generational lows and that Americans simply stop reaching the age where they want to collect Social Security.  It's the only way this thing is going to work.  Unfortunately, I rather doubt that any of the aforementioned four scenarios will take place.


  1. I have absolutely no idea why the Committee was struck in the first place. It always seemed like it was a colossal waste of time and effort for negligible return.

  2. Well, they had to do something to make it look like they deserved their pay and perks. Too bad running a government didn't even enter their heads.

    I still say, now more than ever, that we're just going to get together, shake our heads ruefully and then everybody cancels everybody's debt to everybody. Clean slate! Except for China, only they may want to play to an extent, as well. Certainly, it will be harder to convince people to buy when they are expected to actually pay!


  3. I had a teacher once tell me that "if you ever want to not get anything done; hire a committee!"

    Point being that a committee lacks accountibility!

    Thanks PJ for the update on the Budget Control Act. I still find the Act rather confusing.

  4. @PJ, I have to admit that I was optimistic about the super committee. Luckily I'm used to a bit of embarrassment, so I'll just explain why I was hopeful. I thought the hard work of compromise had already been done by Simpson-Bowles, so the super committee could look at the report and pick the items they could agree on or tweak. Being smaller could aid agreement. But we saw how well that worked.

    I have a lot more respect for the debt deal now (though the Republicans are regretting it). I hope no one weasels out of the cuts. The deficit is the biggest risk to the country. I want to see what it's like when we make the first steps to tame it.

  5. Moody's wants the U.S. to reduce its deficit, but at the same time it wants it to increase its deficit:

  6. The freeloaders are drawn by lavish salaries, pensions, and benefits