President signs debt ceiling increase/deficit reduction bill

Wednesday, August 3rd, 2011

Yesterday, the president signed the bill ending the months-long stalemate on increasing the debt ceiling hours before the United States was set to default on its financial commitments [debt].  The debt ceiling deal was reached Sunday and approved by the House (269-161) on Monday and by the Senate yesterday (74-26).   

The bill establishes procedures for increasing the current $14.3 trillion debt ceiling by as much as $2.4 trillion.  The president is allowed to increase borrowing authority immediately by $400 billion (which he did) to avoid default.  This action will be followed by additional increases into 2013, subject to a congressional vote of disapproval.  This would mean that the next real showdown on further debt ceiling increases would not occur until after next year’s election.

The bill calls for up to $2.2 trillion in reductions to total discretionary—funding provided in appropriations acts—spending between FY2011 and FY2021 (compared to the Congressional Budget Office baseline estimates).  The bill amends the Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings) to set lower discretionary spending levels and provide enforcing mechanisms to reach these levels.  The $2.2 trillion cut will be made in two installments.

First, total spending will be cut by about $1 trillion over 10 years as a result of discretionary budget totals set in the bill (Title 1, Sec. 101).  Security budgets (DoD, Homeland Security, Veterans Affairs, and State and International Programs) will be cut by $350 billion, according to statements by the president and congressional leaders.  This is compares to the $400 billion in security budget cuts over 12 years called for by President Obama.  The remaining $650 billion would come from non-security budgets.  Mandatory spending (such as Social Security and Medicare) is not affected in this installment.

The second installment, the “more to come” provision of the bill, has attracted the most attention and concern.  The bill establishes a 12-person Congressional Joint Select Committee on Deficit Reduction made up of six Republican and six Democrat lawmakers to find another $1.5 trillion in deficit reductions.  This committee has until November 23, 2011 to report a legislative proposal to achieve this goal.  The committee will consider a combination of additional discretionary funding cuts and entitlement and tax reforms.

If the committee fails to produce recommended legislation achieving at least $1.5 trillion in deficit reductions, the bill sets automatic procedures to cut $1.2 trillion more from federal budgets through FY2021.  Of this amount, $600 billion would come from security budgets. 

The current political dynamics cast doubt on the committee’s ability to agree on a final proposal, or that such a proposal could include significant entitlement or tax reform proposals.  Therefore, federal agencies could be facing potential budget cuts of up to $2.2 trillion over the next 10 years, with DoD looking at as much as $1 trillion of the total.

But, for now, DoD and other agencies are looking at how the FY2012 budget will be affected.  The House Appropriations Committee has already set its subcommittee allocations for FY2012, all of which were below the president’s request (the DoD bill was cut by $9 billion). The Committee has reported out all 12 appropriations bills and the full House passed six of these.  In the Senate, only the FY2012 Military Construction/VA Appropriations bill has been approved by the Senate Appropriations Committee.  The full Senate passed that bill last month. 

As a result of the debt ceiling agreement, the House and Senate Appropriations committees will have to reset their allocations to reflect the lower amount set in the bill for FY2012 total discretionary funding, with separate subtotals for security and non-security budgets.  Any legislative action that has already been taken will have to be changed.

This not only affects agencies’ planning for FY2012 budget execution (set to begin in less than two months), but also is critical to the FY2013 and outyear budget builds currently underway.  For example, DoD is now building a budget plan predicated on President Obama’s direction to cut $400 billion from the previous plan.  DoD will now have to readjust this planning to respond to impending congressional changes to FY2012 and new long-term funding limits.  But, that is just the first step.  With the possibility of lower, even more drastic budget cuts coming in November, DoD and other agencies are truly facing a budget nightmare that will have almost unprecedented force structure and program implications.

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