Debt Reduction Deal

Aug 1, 2011

WHAT'S THE BIG DEAL?

The deal on the debt ceiling increase and deficit reduction comes in two parts -- what will Congress do about raising the debt ceiling? and how will Congress agree to cut spending or raise revenues to bring income and spending into a closer balance? House and Senate are both considering legislation today -- at the 11th hour -- to address both questions.

FIRST: THE DEBT CEILING INCREASE The bill would authorize raising the debt ceiling in two stages, by an amount between $2.1 trillion and $2.4 trillion.

Stage one: $900 billion now. As soon as the president certifies that the Treasury is within $100 billion of its limit, a debt ceiling increase of $400 billion is immediately authorized. Congress then has 50 days to adopt a “resolution of disapproval” and to overcome an anticipated presidential veto. Unless successfully disapproved, the remainder of the first $900 billion would be released.

If the debt ceiling increase is successfully disapproved, the rest of the first $900 billion increase would not be authorized, and an immediate sequester (to make up for the $400 billion debt limit increase that already went into effect) would be imposed. (Sequester means cutting actual spending across all departments.)

Stage two: When the president again certifies that the Treasury is once again within $100 billion of its limit, he may request a debt limit increase between $1.2 and $1.5 trillion. The amount depends on the size of the deficit reduction recommended by the Joint Committee (see below).

Balanced Budget Amendment: Both houses of Congress would be required to vote on a Balanced Budget Amendment. If the Amendment is approved and sent on to the states for ratification, the stage two debt limit increase becomes immediately available, at the higher figure, $1.5 trillion.

THEN, DEFICIT/ DEBT REDUCTION The deficit (the yearly amount by which revenues and spending are out of balance) and the debt (the accumulation of deficits) can be reduced by decreasing spending or increasing revenues.

Stage one: The first stage deals only with cutting spending. The bill places discretionary spending caps on programs that need appropriations bills each year for their funding.

The bill names separate spending caps for “security spending” and “non-security spending. “Security spending,” in this stage, includes Departments of Defense, Homeland Security, and Veterans Affairs, plus the National Nuclear Security Administration in the Energy Department, the “intelligence community management account” and the entire international affairs budget. The rest of the budget is considered “non-security spending.”

Stage two: For this stage, Congress will appoint a bi-partisan, bi-cameral (i.e. House and Senate) committee of twelve, known formally as the “Joint Committee” and less formally as the “Gang of 12.” This committee is charged with achieving at least $1.2 trillion in deficit/debt reduction over the next decade, from further discretionary cuts, savings in entitlement programs, or new revenues.

Stage 2.5: If Congress does not approve the Joint Committee’s bill, or if the bill falls short of its goal, the Office of Management and Budget is directed to “sequester” (i.e. not spend) the amount of money needed to make up the difference between what was approved and the $1.2 trillion goal.

Security and non-security spending are capped at separate dollar amounts. At this point, the definitions of “security” and “non-security” spending are revised. Department of Defense (Budget Function “050”) is considered security spending, and the rest of the budget is now considered “non-security spending.”

Cuts in the Department of Defense budget in Stage 2.5 equal about $100 billion per year, compared to President Obama’s FY2012 budget proposal.

Medicare cuts for this stage are limited to 2 percent per year.

A number of entitlement programs for the benefit of low income programs are exempt from the sequester.

Exempt low-income programs (exempt only from sequester): Temporary Assistance for Needy Families Supplemental Security Assistance Program Family Support Program Supplemental Nutrition Assistance Program (Food Stamps) Commodity Supplemental Food Program Medicaid Child Care Entitlements to States Refundable Income tax Credits Child Nutrition Programs Children’s Health Insurance trust fund Federal Pell Grants (student aid)

In addition, the following exempt programs benefit many low-income as well as middle-income individuals and families: Social Security Trust Funds Unemployment Trust Fund Black Lung Disability Trust Fund Health Care Trust Funds Tribal and Indian trust accounts in the Department of the Interior Low Rent Public Housing Loans and Expenses

CHALLENGES
In Stage one, discretionary programs that support and protect the most vulnerable people are not protected. Programs like Head Start, community services block grants, most housing assistance, nutritional assistance for Women, Infants, and Children, community health programs and many programs for the elderly will face deep and serious budget cuts. Even though the large entitlement programs are not affected at this stage, they only form part of the picture. Many of the services that provide access to the basic food and income assistance programs will face staff and resource cuts.

At this stage, at least, the low-income programs “compete” with fewer popular and essential programs for funding. Veterans programs, Homeland Security, for example, are counted on the “security” side of the ledger.

Stage One is likely to require some significant cuts in Department of Defense spending, because its budget is simply the largest one in the “security” category. The tiny International Affairs budget – particularly programs that support diplomacy and development – are likely to lose most of their funding. But that small amount won’t meet the goals for that category.

Stage Two is much more of a mystery. The “gang of 12” will have just a few weeks to accomplish what Congress has been unable to accomplish all these months. At the end of their process – if it fails -- is the threat of a sequester which (1) does not include any revenues and (2) includes fairly significant cuts in the Department of Defense Budget (about $100 billion per year.) The Stage Two sequester (if there is one) also exempts many important low-income programs; the "Gang of 12" is not under any restriction to make similar exemptions. Congressional leaders apparently believe that the incentive of the sequester will force serious consideration of a combination of revenue and entitlement reforms in the Stage Two process.

The Gang of 12 is expected to report back to Congress by November 23, and Congress must come to a decision by December 23, in order to avoid the sequester.

All of this process will calm the deficit/debt reduction storm until early in 2013, when it will have to start up again. The whole process may have to be re-enacted year after year, until the economy improves significantly, or until Congress decides to raise the amount of revenues that the country needs to fund what it needs to do.