Following is the summary of a recent Congressional Research Service report assessing the impact of potential automatic cutting in many government programs that could begin in January under terms of last year’s debt ceiling agreement, unless further savings or revenues are enacted before then sufficient to prevent the cuts.
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. Combined, these measures are projected to reduce the deficit by roughly $2 trillion over the FY2012-FY2021 period.
There are two main groups of 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 (sometimes referred to as the “trigger”) that will come into effect on January 2, 2013, unless new legislation is enacted to prevent it. The House FY2013 Budget Resolution (H.Con.Res. 112), which passed the House on March 29, 2012, and the President’s FY2013 Budget both propose eliminating the trigger and replacing it with alternative measures to reduce the deficit.
To provide context for this debate, this report discusses the effects of the BCA on spending and the deficit, assuming that the January 2013 automatic spending reductions proceed as scheduled.
The BCA spending cuts mainly apply to discretionary spending—$0.8 trillion in cuts to defense programs and $0.7 trillion in cuts to non-defense programs over 10 years. Mandatory spending is cut by less than $0.2 trillion over 10 years, with most of the savings from Medicare. Many mandatory programs are exempt from these cuts, as are certain types of discretionary programs.
More than half of the spending cuts are through the “trigger” process, which has not yet come into effect. In FY2013, the first year of the “trigger,” defense discretionary budget authority subject to the BCA caps would decline by 11.5%, and non-defense would decline by 9.8%. In FY2013, real (inflation-adjusted) defense discretionary spending subject to the BCA caps is lower than its FY2005 levels, and real non-defense discretionary is lower than its FY2003 levels. After FY2013, 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 not return to its FY2011 levels in real terms at any point in the 10-year budget window. Defense and non-defense discretionary spending subject to the caps will also not return to FY2011 levels in real terms during the budget window.
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. From FY2018 on, overall discretionary spending would be below its lowest share of gross domestic product (GDP) since data were first collected in 1962, 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 be above its post-World War II average share of GDP at the end of the 10-year budget window.
When fully implemented, the BCA reduces deficits by about 1% of GDP each year. Under a current law baseline, the budget is on a sustainable path, in the sense that the publicly held debt would decline as a share of GDP (although it would continue to rise in dollar terms). Under a current policy baseline, where expiring tax cuts, the alternative minimum tax patch, and the Medicare “doc fix” are assumed to be extended, deficits are unsustainably large even after enactment of the BCA.