Practitioner's Corner

The Budget Control Act: A Breakdown


						                        
          

Rich Meade, Managing Director at Prime Policy Group, made a presentation at the Republican National Committee’s Summer Meeting on August 4th about the efforts to raise debt limit. He participated in a panel on this topic and explained how the recently enacted legislation will work and what to expect in the future in terms of the joint committee, possible sequestration, etc. 

Here are some of Rich’s prepared comments:

Joint Committee on Deficit Reduction

The Budget Control Act establishes the Joint Select Committee on Deficit Reduction to identify $1.5 trillion in deficit reduction over the period of fiscal years (FYs) 2012-2021.  The joint committee is simply charged with achieving deficit reduction with no restrictions on how they accomplish the net reductions in the deficit.   

I use net deficit reduction as it is certainly possible for the joint committee to consider policies that increase spending or cut taxes so long as those policies are accompanied by sufficient deficit reduction from spending cuts or new revenues.  The Biden Commission had discussions about the need to fix the Sustainable Growth Rate (SGR) for Medicare to avoid having physicians face a sharp reduction in payments from Medicare starting on January 1, 2012.  Similarly, it is possible that the joint committee might consider either a patch for the alternative minimum tax (AMT) or even repeal of it entirely.  In either case, additional cost savings or new revenues would be needed to offset the costs of the SGR fix or the AMT patch should the joint committee decide to include such provisions in their report.    

Role of Standing Committees

The Budget Control Act provides that the standing committees of Congress may report to the joint committee by October 14th proposals for achieving deficit reduction.  It will be interesting to see how the committees handle this optional reporting requirement. 

It is possible that some committees would prefer to offer specific recommendations for how to achieve deficit reduction from programs in their jurisdiction rather than allow the joint committee to make those policy decisions.  If committees do so, the process could resemble the budget reconciliation process where the joint committee would serve in a similar capacity as the Budget Committees aggregating savings recommendations.  The risk here is that since the committees do not have a target for achieving deficit reduction, as they would in the reconciliation process, committees could propose cuts far deeper than the joint committee might have otherwise done.

It is also possible that the committees will view this option more along the lines of the process for the views and estimates on the President’s Budget.  In that process, committees report out letters that offer the committee’s position on policies in the President’s budget.  It is also possible the committees will not act publicly but will lobby the joint committee behind the scenes to influence decisions by the joint committee.  Regardless of the path the standing committees take, it is clear that they will seek to have their voices heard in the deliberations of the joint committee.

Sequestration

If the joint committee is unable to achieve$1.5 trillion in deficit reduction, then two things will happen.  First, the amount of additional borrowing will be limited to $1.2 trillion rather than $1.5 trillion.  Also, a sequestration process is triggered to cut spending cuts of $1.2 trillion if no deficit reduction is achieved by the joint committee or of the amount of the difference between the amount of deficit reduction achieved and $1.2 trillion.

The sequestration process itself is not new as there have been 5 times in history where a sequestration has been triggered (three under the Gramm-Rudman-Hollings deficit targets and two under the statutory discretionary spending caps).  However, it is safe to say that the sequestration process has never been used for spending cuts of this magnitude.

The sequestration process is one where across-the-board spending cuts are applied to government programs in order to meet a budgetary goal.  There are a number of programs exempt from sequestration by statute.  Those programs not specifically exempted constitute what is considered to be the sequester base.  The Office of Management and Budget is required by law to apply the spending cuts uniformly to all programs, projects, and activities within a budget account in the sequester base.   

The amount of the sequestration that could be triggered under the Budget Control Act will be determined by how much deficit reduction can be achieved by the joint committee.  If the joint committee can produce $1.2 trillion in savings, there will be no sequestration.  However, if the joint committee produces less than $1.2 trillion in deficit reduction the sequestration will be based upon the difference between $1.2 trillion and the amount of deficit reduction the joint committee can produce. 

To illustrate how the sequestration process will work, let’s assume the joint committee cannot agree upon any deficit reduction.   In that case, the amount of the sequestration will be calculated by taking $1.2 trillion and discounting it by 18% for the interest savings that would be achieved from the deficit reduction.  That leaves approximately $984 billion.  The law then divides that amount by 9 so there is an equal amount of deficit reduction achieved each year in the budget window which equates to a little more than $100 billion in deficit reduction achieved annually through sequestration.  The savings will be split between defense and non-defense programs.

For mandatory spending programs, the cuts will be done automatically each fiscal year.  For discretionary spending programs, the cuts will be done automatically in FY 2013 to discretionary spending programs in the sequester base.  For FY 2014-2021 the discretionary sequester is achieved by lowering the discretionary spending caps by the sequester amount.  That will allow the House and Senate Appropriations Committees to make the choices about how to achieve those spending cuts on a program-by-program basis rather than via an across-the-board spending cut.   

Conclusion

I believe the enactment of the Budget Control Act will mark an era of austerity.  Whether policies are changed by the joint committee or spending cuts are made through sequestration, we are entering a period where federal programs and policies will be challenged.