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Wednesday, September 28, 2011

The Budget Control Act of 2011: Effects on Spending Levels and the Budget Deficit

Marc Labonte
Specialist in Macroeconomic Policy

Mindy R. Levit
Analyst in Public Finance

The Budget Control Act of 2011 (BCA) was signed into law by President Obama on August 2, 2011 (P.L. 112-25). In addition to increasing the debt limit, the BCA contained a variety of measures intended to reduce the deficit by at least $2.1 trillion over the FY2012-FY2021 period, including statutory caps on discretionary spending and the establishment of a Joint Select Committee on Deficit Reduction to identify further budgetary savings of at least $1.2 trillion over 10 years.

The BCA discretionary spending caps are projected to result in $917 billion in deficit reduction over the FY2012-FY2021 period. Several adjustments to the caps are permitted, including for spending on Overseas Contingency Operations and emergencies. The precise programmatic impact of these reductions in discretionary spending will be determined in the annual appropriations process. Under CBO’s August 2011 baseline, which incorporates the effects of the BCA, the discretionary spending caps result in a decline in spending in nominal dollar terms. Discretionary spending has fallen in nominal terms only three times since FY1962, most recently in FY1996. Discretionary spending under the caps is projected to decline from 9.0% of GDP in FY2011 to 6.2% of GDP in FY2021. Since FY1962, the first year for which data are available, discretionary spending has only been that low in one other year (FY1999).

Beyond the BCA’s deficit reduction achieved via the discretionary spending caps, the Joint Committee was created to find an additional $1.2 trillion in deficit reduction by January 15, 2012. If the Joint Committee cannot agree to deficit reduction legislation or it is not enacted, then an automatic spending reduction process would be triggered beginning in FY2013. The automatic reduction would be divided evenly between defense and non-defense spending. CBO estimates that if no Joint Committee legislation is enacted, the automatic reduction in spending for nonexempt accounts in FY2013 would be 10% for defense, 2% for Medicare, and 7.8% for other mandatory and non-defense discretionary, resulting in further deficit reduction of $1.1 trillion between FY2013 and FY2021. Any cuts to discretionary spending through the automatic reduction would be in addition to those resulting from the discretionary spending caps.

While the BCA is projected to reduce the deficit, it does not eliminate budget deficits or growth in the federal debt over the 10-year budget window. Using the CBO current law baseline (where a series of tax cuts are assumed to expire and controls on Medicare payments to doctors are allowed to take effect), budget deficits are estimated to total $3.5 trillion and the federal debt is projected to increase by $4.3 trillion over the next 10 years. Under what some call a more realistic baseline (where a series of tax cuts are extended and controls on Medicare payments to doctors are not allowed to take effect), deficits over the next 10 years total $8.5 trillion and the debt would continue to rise faster than GDP. Since the debt cannot perpetually rise faster than GDP, additional spending cuts or revenue increases would eventually be needed.

Since deficit reduction under the BCA’s discretionary caps is relatively small in FY2012, the short-term effects on the economy should be limited. Were Congress to enact a Joint Committee plan that reduced the deficit significantly in FY2012, this would increase the BCA’s contractionary effects on the economy. In the long run, economic theory suggests that large deficits would have negative effects on interest rates, investment spending, trade deficits, and GDP.

Date of Report: September 1
6, 2011
Number of Pages:
Order Number: R4
Price: $29.95

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