Inside Deficit Reduction: What Now?

Budget Control Act of 2011 – Post Super

Committee

Katherine Hayes, JDAssociate Research ProfessorDecember 2, 2011

Discretionary v. Direct Spending

• Discretionary Spending– Spending that must be appropriated each year by

Congress – 12 regular appropriations bills (e.g., Labor-HHS)

• Direct or Mandatory Spending– Spending for programs that may continue, usually

without reauthorization (e.g., Social Security, Medicare, and Medicaid)

– Not dependent on annual appropriations

Budget Control Act of 2011 (P.L. 112-25)

• Debt ceiling• Balanced Budget Amendment vote• Joint Select Committee on Deficit Reduction

or “Super Committee”• Enforcement

– Title I Discretionary spending caps ($900 billion)– Section 302 – Revised caps and sequestration

($1.2 trillion)

• Education provisions

Fallback Enforcement • $1.2 trillion spending reduction process begins

on January 2, 2013 (unless the law is changed)

• Statutory spending limits (appropriations caps) are revised and extended through FY 2021

• Evenly split between defense (budget function 50) and nondefense

• Proportional division between discretionary and direct spending in each of the two categories (defense v. nondefense)

Sequestration Continued• FY 2013 – Sequestration applies to both discretionary

and direct spending since reductions start after 1st quarter of fiscal year (October 1, 2012)

• FY 2014-2021 – President issues sequestration preview report (OMB estimates)– Discretionary spending achieved by adjusting

statutory caps– Direct spending achieved through sequestration of

non-exempt programs• Medicare reductions limited to 2 percent

Exempt Programs

Section 255 of the Balanced Budget and Emergency Deficit Control Act of 1985 (as amended)

2 U.S.C § 905 - Exempt Programs and Activities

http://www.gpo.gov/fdsys/pkg/USCODE-2010-title2/pdf/USCODE-2010-title2-chap20-subchapI-sec905.pdf

Exempt Programs and Activitiesa) Social Security and tier I railroad retirement

benefits

b) Veterans programs

c) Net interest

d) Refundable income tax credits (e.g., EITC, ACA premium tax credits)

e) Non-defense unobligated balances (prior year carry over)

f) Option: military personnel account (Presidential discretion with notification to Congress)

Exempt Programs and Activities

g) Other programs and activities

1(A) list of 72 programs (including payments to health care trust funds)

(B) Federal retirement and disability accounts and activities (34

programs)

2) Prior legal obligations of the U.S. government

h) Low-income programs (14 programs including Medicaid, TANF, SNAP, SSI, foster care, child care)

CBO Estimates FY 2013-2021

• Revised Discretionary Spending Caps– Defense - $454 billion – Nondefense - $294 billion

• Reductions in Direct Spending– Defense - $150 million– Nondefense - $170 billion

• Medicare - $123 billion

• Other - $47 billion

Source: Congressional Budget Office

Savings from Automatic Reductions

Source: Congressional Budget Office

Recap

• Effective January 2, 2013, automatic spending reductions of $1.2 trillion (assuming no intervening change in law)

• Discretionary caps revised and extended through FY 2021 (defense and non-defense)

• Within each category, proportional division between discretionary and direct spending for “non-exempt” programs subject to sequestration

• Medicare limited to 2 percent to remainder of cuts split between other non-defense, non-exempt programs

Additional Resources• CRS Report: The Budget Control Act of 2011

http://www.fas.org/sgp/crs/misc/R41965.pdf

• Congressional Budget Office– Testimony before the Joint Select Committee on

Deficit Reduction http://www.cbo.gov/doc.cfm?index=12490

– Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act http://www.cbo.gov/doc.cfm?index=12414