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Tuesday, April 16, 2013

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

Mindy R. Levit
Analyst in Public Finance

Marc Labonte
Coordinator of Division Research and Specialist

Following a lengthy debate over raising the debt limit, the Budget Control Act of 2011 (BCA; P.L. 112-25) was signed into law by President Obama on August 2, 2011. In addition to including a mechanism to increase the debt limit, the BCA contained a variety of measures intended to reduce the budget deficit through spending reductions. There are two main components to the spending reductions in the BCA: (1) discretionary spending caps that came into effect in FY2012 and (2) a $1.2 trillion automatic spending reduction process that was initially scheduled to come into effect on January 2, 2013. Combined, these measures were projected to reduce the deficit by roughly $2 trillion over the FY2012-FY2021 period. The American Taxpayer Relief Act (ATRA; P.L. 112-240) reduced and postponed the start of the FY2013 spending reductions, commonly known as the sequester, until March 1, 2013.

Congress has debated whether to maintain scheduled BCA spending cuts in future years. To inform that debate, this report discusses the effects of the BCA on spending and the deficit, assuming that the automatic spending reductions proceed as scheduled from FY2013 to FY2021 and the discretionary spending caps remain in place. The BCA spending cuts mainly apply to discretionary spending, split almost evenly between defense and non-defense programs. Over 10 years, discretionary spending is cut by $1.6 trillion, whereas mandatory spending is cut by less than $0.2 trillion, with most of the savings coming from Medicare because most mandatory spending is exempt from the BCA’s spending cuts. Mandatory spending accounts for 65% of spending in FY2013, but receives 20% of the sequester cuts.

The BCA, as amended by ATRA, reduced FY2013 discretionary spending subject to the caps to 6.4% below FY2012 levels. In FY2013, real (inflation-adjusted) discretionary spending subject to the BCA caps is lower than FY2005 levels. Discretionary spending in FY2014 falls 1.8% relative to FY2013 levels as the automatic spending reduction process comes into full effect. After FY2014, the discretionary caps would rise by about the rate of inflation in subsequent years. As a result, discretionary spending subject to the caps does not return to its FY2011 level until FY2018 in nominal terms and will never return to FY2011 levels in real terms through FY2021.

The effects of the BCA on overall discretionary spending will depend on what levels of spending Congress chooses for categories of discretionary spending not subject to the caps, namely overseas contingency operations (OCO), disaster spending, and emergency spending. No emergency spending was enacted in FY2012, but $42 billion was enacted in FY2013. From FY2011 to FY2013, total discretionary spending declined by an annual average of 5.1%, after rising by an annual average of 5.6% from FY2001 to FY2010. Discretionary spending averaged 9.4% of GDP from FY1962 to FY2011. From FY2018 on, overall discretionary spending would be below its lowest share of gross domestic product (GDP) since data were first collected in 1962 (6.1% of GDP), assuming current levels of OCO and disaster spending. Mandatory spending, by contrast, is projected to continue to grow in nominal terms, real terms, and as a percentage of GDP over the next 10 years. Because of the projected growth in mandatory spending, total federal spending would rise to 22.4% of GDP in FY2021, above its post-World War II average.

Although the BCA reduced projected deficits, its savings has been more than netted out by other subsequent legislation, namely ATRA, that has increased current law deficits since the BCA was enacted. Altogether, legislative changes since March 2011 have increased the deficit by $1.8 trillion from FY2012 to FY2021. As a result, the federal debt is projected to continue to increase relative to GDP in future years.

Date of Report: April 1, 2013
Number of Pages: 22
Order Number: R42506
Price: $29.95

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