How the Potential Across-the-Board Cuts in the Debt Limit Deal Would Occur #p2 #tcot

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pdf: http://www.cbpp.org/files/8-4-11bud.pdf

The debt limit deal enacted on August 2 calls for close to $1 trillion in cuts in discretionary programs over the next decade and would impose automatic, across-the-board spending cuts in many programs if Congress fails to enact an additional $1.2 trillion in deficit-reduction measures by January 15, 2012. Those across-the-board cuts would take effect in January 2013, a year later than many people have mistakenly believed, and would represent approximately a 9 percent annual cut in affected non-defense programs, along with roughly a 9 percent cut in defense programs. (Reports that the percentage cut would be significantly higher in defense than in affected non-defense programs also are mistaken.) This report outlines how the cuts would occur.

Background: Main Elements of the Legislation

The new Budget Control Act, which implements the debt limit deal:

• raises the debt limit by at least $2.1 trillion (in steps), which is currently estimated to be sufficient through early 2013;
• establishes binding limits or "caps" on annual appropriations bills (which cover "discretionary" — or non-entitlement — programs such as defense, education, national parks, the FBI, the EPA, low-income housing assistance, medical research, and many others) that reduce projected funding for these programs by somewhat less than $1 trillion through 2021, depending on how the cuts are measured;
• requires the House and Senate to vote this fall on an amendment to the Constitution that would require a balanced budget every year;
• establishes a Joint Select Committee to draft, and report by December 2 of this year, legislation that would reduce projected deficits by an additional $1.5 trillion through 2021, and creates a fast-track process for Congress to consider the Committee's bill without any amendments; and
  provides for automatic, across-the-board budget cuts in many programs if Congress fails to enact Joint Select Committee proposals achieving at least $1.2 trillion in deficit reduction over the next ten years. (The automatic cuts would be triggered if the Committee does not report the required legislation, if Congress defeats the legislation, if the President vetoes the legislation and the veto is sustained, or to the extent the legislation is enacted but reduces deficits by less than $1.2 trillion.) Those automatic cuts are known as "sequestration."

The Joint Committee can recommend any kind of deficit-reduction measures it wants: further cuts in the new discretionary caps, cuts in any entitlement program, and tax increases of any kind. There may be severe political constraints, but there are no legal constraints, contrary to what some congressional leaders are claiming.[1]

The debt limit increases whether or not Congress enacts the Joint Committee's bill or approves the Constitutional Balanced Budget Amendment. [2] Also, congressional approval of the Constitutional Balanced Budget Amendment would not eliminate the automatic sequestration that would occur if Congress fails to meet the $1.2 trillion target for additional savings.

How a Sequestration Would Work

If the Joint Committee process results in the enactment of less than $1.2 trillion in deficit reduction through 2021, the sequestration would generate sufficient savings to reach a total of $1.2 trillion over that period. (These budget cuts are in addition to the cuts generated by the enactment of discretionary caps as part of the Budget Control Act). If Congress enacts no deficit reduction, the sequestration would therefore be $1.2 trillion. For simplicity, let's assume that result.

• Although the Joint Committee and Congress are supposed to consider legislation this year, the program cuts that would result from a failure to enact sufficient savings would take effect in January 2013, a full year later.
• Under the formula that the Budget Control Act specifies, defense programs would be cut by a total of $55 billion each year from 2013 through 2021, with non-defense programs cut by the same amount.[3]
• The $55 billion in annual non-defense cuts would come from both mandatory (entitlement) and discretionary programs. The mandatory cuts would include:
  • Cuts in Medicare payments to providers and insurance plans (those cuts are limited to 2 percent of such payments in any year, or about $10 billion in 2013).
  • About $7 billion in cuts in the other mandatory programs that are subject to sequestration, the biggest of which is farm price supports. A number of key mandatory programs are exempt from sequestration, including Social Security, Medicaid, CHIP, SNAP (formerly known as the Food Stamp Program), child nutrition, Supplemental Security Income (SSI), refundable tax credits such as the Earned Income Tax Credit, veterans' benefits, and federal retirement.[4]

Thus, in 2013 about $17 billion of the $55 billion in annual non-defense cuts would come from mandatory programs. This share would grow slightly from year to year.

• The remaining non-defense cuts — about $38 billion in 2013 — would come from discretionary programs:
  • For fiscal year 2013, the cuts would occur through across-the-board, proportional reductions in the new funding for each discretionary program in the appropriations bills for the fiscal year, which Congress would already have enacted. (Veterans' medical care and Pell grants would be exempt from those cuts.)[5]
  • For fiscal years 2014 through 2021, the cuts would occur through reductions in the statutory cap on total funding for non-defense discretionary programs for each of those years. The Appropriations Committees would then decide how to live within those newly reduced caps.

The $38 billion reduction in the non-defense discretionary caps would shrink slightly from year to year, because the mandatory cuts would grow slightly and thus would account for a little more each year of the $55 billion in total non-defense cuts.

• A defense sequestration of $55 billion would be imposed in a similar manner. For 2013, the defense cuts would occur through across-the-board, proportional reductions in the new funding provided in the appropriations bills (and in unobligated balances carried over from prior years). For 2014-2021, the cuts would occur through reductions in the statutory caps on total defense funding, with the Appropriation Committees deciding how best to allocate the allowed funding.
  
  In 2013, the one year in which the cuts would affect already appropriated defense funding, the President can exempt some or all military personnel funding from the sequestration. To the extent he chooses that option, the cuts in other Department of Defense military funding would go up.

Our calculations show that a non-defense sequestration of $55 billion would result in cuts of approximately 9 percent in non-exempt entitlement and discretionary programs, as well as the 2 percent maximum cut in Medicare provider payments the law allows. A defense sequestration of $55 billion also would represent a cut of roughly 9 percent in defense programs if military personnel funding is exempt from sequestration, and about a 7 percent cut if it is not.

End Notes:

[1] See James R. Horney, "Contrary to Speaker Boehner's Claim, Budget Deal's 'Supercommittee' Can Consider Revenue Increases," Center on Budget and Policy Priorities, August 1, 2011, http://www.cbpp.org/files/8-1-11bud.pdf.

[2] The debt limit increase would be $2.4 trillion rather than $2.1 trillion if Congress approves the Balanced Budget Amendment or if the Joint Committee's bill saves at least $1.5 trillion through 2021 and is enacted.

[3] Under the legislation, the interest-payment savings that the sequestration would produce (as estimated using a ratio specified in the legislation) would count toward the $1.2 trillion target. Thus, a, sequestration sufficient to produce $1.2 trillion in deficit reduction (as in the example considered here) would reduce programs by $984 billion over nine years (2013 through 2021), or $109 billion per year; the remaining $216 billion would come through lower interest payments.

[4] The exemptions occur because the Budget Control Act is drafted as a portion of the Balanced Budget and Emergency Deficit Control of Act of 1985 (BBEDCA), which contains a list of exemptions in section 255 and a list of special rules in section 256. Those two provisions of BBEDCA were most recently updated by the Statutory PAYGO Act of 2010, and are not changed by the Budget Control Act.

[5] While not exempt from sequestration, funding for community and migrant health centers and for Indian health services and facilities cannot be cut more than 2 percent. In this analysis, "new funding" means new budget authority and includes advance appropriations that first become available for obligation in 2013. The term does not include unobligated balances carried over from prior years.