Budget Control Act of 2011 Raises the Debt Ceiling, But At What Cost?

First the good news: last week’s agreement to raise the debt ceiling averted a catastrophic default on U.S. obligations that would have triggered a worldwide financial crisis. Now the bad news: the Budget Control Act of 2011 will immediately result in deep cuts to vital programs for vulnerable populations and will likely result in even greater cuts in the future, without balancing those cuts with increases in revenue. Indeed, it does not provide for any increase in revenue at all. Below is a summary of the main points of the accord, with analysis of what the resolution of this crisis bodes for the future.

The agreement raises the debt ceiling by $2.1 trillion, enough that it won’t have to be raised again until after the next presidential election in November 2012. The agreement also provides that the deficit will be reduced by more than $2 trillion over the next 10 years, with deficit reduction occurring in two steps.

Step one is a spending reduction of $900 billion over the next 10 years, accomplished with binding caps on annual appropriations bills. All of these cuts will be made to “discretionary spending”. Entitlement spending, including safety-net entitlement programs for low-income people, is exempt from being cut. In addition to the “big three” entitlement programs – Social Security, Medicare and Medicaid – other non-discretionary programs exempted from being cut include:

  • child care mandatory assistance;
  • child nutrition entitlement programs, e.g., school meals;
  • Children’s Health Insurance Program (CHIP);
  • child support enforcement and family support programs;
  • Pell Grants;
  • foster care and permanency programs;
  • Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamps);
  • Supplemental Security Income (SSI);
  • refundable tax credits, including the Earned income Tax Credit and Child Tax Credit; and
  • Temporary Assistance for Needy Families (TANF).

Discretionary programs that are subject to the caps that will result in $900 billion in cuts over the next 10 years include:

  • discretionary (non-mandatory) child care assistance;
  • Head Start;
  • Women, Infants and Children (WIC) nutrition program for low-income women, infants and small children;
  • maternal and child health;
  • Title X family planning services;
  • low-income housing assistance;
  • low-income energy assistance; and
  • Older Americans Act congregate and home-delivered meals.

Step two is complicated. It begins with the congressional appointment of a 12-member deficit reduction super committee, with three members appointed by each legislative leader. The super-committee’s charge is to come up with a deficit-reduction package that saves at least another $1.5 trillion over the next 10 years. The super committee is free to consider all possibilities, including more cuts in discretionary spending, cuts in entitlement spending, and revenue-raising measures. If a majority of the super committee agrees on a proposal, then it will be submitted to Congress for an up-or-down vote by the end of this year.

If, as largely expected, the super committee does not reach an agreement on a deficit-reduction package -- or Congress does not approve the package or the President vetoes it -- then federal spending will automatically be reduced by $1.2 trillion over the next 10 years through a process called “sequestration.” Entitlement programs (listed above) would be exempt from cuts, and revenue would not be increased. Rather, all of the cuts would come from discretionary programs, with half of the reduction coming from domestic programs and the other half from defense spending. This would amount to a 9 percent decrease in both domestic discretionary spending and defense spending – an amount that many believe would seriously compromise national security. The cuts made by sequestration would not go into effect until January 2013.

Speaker Boehner has already announced that the U.S. House of Representatives will not approve any revenue increases that the super-committee may recommend. To understand what the impact of a “cuts only” proposal would be, it’s worth considering the deal that President Obama and Speaker Boehner recently discussed. That ultimately unsuccessful deal would have:

  • raised Medicare’s eligibility age and cost-sharing charges;
  • shifted significant Medicaid costs to states;
  • modified cost-of-living adjustments in Social Security and other benefit programs (and in the tax code); and
  • instituted other entitlement savings.

All of those steps would have saved $650-$700 billion over 10 years, representing only one-half of the cuts that the super committee will have to produce.

One other noteworthy provision in the Budget Control Act of 2011 is an agreement to allow an up-or-down vote of the House and the Senate this fall on a constitutional amendment to balance the budget, threatening to enshrine this popular but fiscally ruinous principle in the U.S. Constitution.

To sum up, the most disturbing aspect of the Budget Control Act of 2011 is that it achieves all of its savings through spending cuts despite polling that shows a large majority of Americans across all population sectors supports a balanced approach that includes increasing taxes on the wealthy and big corporations to help reduce the deficit. This cuts-only approach sets an extremely disturbing precedent for future budget and spending battles.

Second, although some of the most extreme proposals floated this year, such as a global spending cap or super-majority requirement to raise taxes or the debt ceiling, were not included in the final agreement, it does include the mandatory spending reduction mechanism of sequestration. And, while low-income entitlement programs are exempt from sequestration, discretionary programs on which low-income populations rely enjoy no such protection and are, in fact, under a direct threat to be heavily cut.

So what does the future hold? For one thing, it appears that Medicaid is now in the cross-hairs. Conservatives in Congress have consistently signaled a desire to scale-back Medicaid. They receive strong support for this agenda from conservative governors who seek the power to generate state budgetary savings if Medicaid is changed to allow them to cut the program and roll-back eligibility. It’s hard to see how any of this can be squared with implementation of the Affordable Care Act, whose health care reforms rely on expansion of the Medicaid program to insure 16 million currently uninsured people.

Now that the debt ceiling has been raised for the time being, the next flashpoint will be the adoption of a budget for the next federal fiscal year beginning October 1. Typically, no agreement is reached by that date, and the government continues to operate based on a series of “continuing resolutions” until a full-year budget is agreed upon. If one of these continuing resolutions runs out without an agreement to extend it, then the federal government shuts down. A sizable majority of the House Republicans just demonstrated their willingness to risk a global financial cataclysm to achieve their policy ends. There is little reason to doubt that they will be willing to engage in such brinksmanship again. Indeed, they may attempt to extract even greater concessions when all that is at stake is the continued operations of the federal government, since they will feel there is less to lose in provoking a crisis. The template for resolving such a crisis, as established by this debt ceiling deal–substantial spending cuts, no revenue increases, a mandatory mechanism to enforce deficit reduction–sets a bad precedent for future policy negotiations, unless different tactics are adopted by proponents of important spending priorities for struggling Americans.

Beyond that, there are a number of events that will be occurring in the lame-duck session just after the next presidential election in November 2012. The Bush tax cuts will be expiring; the January 2013 automatic sequestration cuts (assuming no super committee agreement that becomes law), including deep cuts in national defense, will be taking effect; and the debt ceiling will have to be increased again. The battles that were just waged thus are simply the prelude for many more to come. 

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