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Explainer: The Debt Deal - What Happens Next and What's on the Chopping Block?

Wednesday, August 03, 2011

At the last second and after weeks of contentious partisan posturing, the president and Congress have agreed on a deal to raise the public debt ceiling and reduce future deficits. But what does the bill actually do? Who's going to be affected and what's in line to get cut? 

The new legislation:

  • creates caps on discretionary spending for the next ten years
  • requires Congress to create and vote on a joint resolution proposing a balanced budget amendment to the Constitution,
  • raises the debt limit by $400 billion (with two additional raising-opportunities scheduled that could raise it by as much as $2.4 trillion)
  • creates a Congressional committee on deficit reduction which will propose another $1.5 trillion in cuts over the next decade, which Congress will either have to adopt or trigger $1.2 trillion in automatic cuts.

Robert Bixby, Executive Director of the Concord Coalition fiscal policy think-tank, takes issues with the bill’s failure to tackle entitlements or raise revenue. He finds it unlikely that any committee will have the political will to do what Congress could not.

“As a deficit hawk, that kind of worries me, because it means the deal was kind of structured to prevent the problem from being solved... Right now I’d be inclined to think that this committee is not going to be the vehicle through which that happens.”

What the "Cuts" Actually Cut

An important distinction is that these cuts are not actually cuts in the budget, nor are they reductions in the deficit. The amount of government spending will, in fact, increase every year over the next ten years. Rather the cuts made in the deal are to future increases in spending. 

So, say $50 billion is scheduled to be cut in 2013, which has a baseline budget of $13,000 billion. Rather than decreasing the budget from $13,000 billion to $12,950 billion, what instead will happen is that the $13,000 will increase by $50 billion less than the amount it was projected to increase – so instead of increasing by the projected amount of $150 billion, it can only increase by $100 billion. So next years baseline budget will be $13,100 billion, instead of the $13,150 billion it would have been if there were no cuts. 

The Congressional Budget Office (CBO) estimates that the legislation as it stands now, without the additional $1.5 trillion in cuts to be proposed by the joint Congressional committee, will reduce budget deficits by $917 billion between 2012 and 2021. If you add to that the minimum of $1.2 trillion that will be triggered if the committee’s recommendations are not adopted, the legislation will reduce the deficit by at least $2.1 trillion in total.

Short and Long Straws

While the bill lays out the reductions on discretionary funding caps, it will be up to an appropriations committee to say where that reduced amount will be granted. Additionally the joint committee is tasked with finding deeper cuts, either through changing entitlement programs not subject to appropriations--such as Medicare and farm programs, adding additional revenues, or setting even lower caps on discretionary spending.

It is too soon to tell where either of these cuts are going to come from. Congressional leaders will be appointing the Joint Committee in the next two weeks, and until the committee starts naming its recommendations it is impossible to say what programs or services may feel the pinch, though there are certain likely candidates.

Some cuts will have to be made even before the committee issues its recommendations in November, as the bill requires a reduction of $25 billion for fiscal year 2012, which begins October first. That determination of who receives funding will probably come from the appropriations committee, but as they may be reluctant to set that determination without the joint committee's recommendations, it seems not unlikely that another series of continuing resolutions may push the decisions later.

Yesterday’s legislation did name a few of the winners and losers of this deal. One thing is clear—while there will be winners, at least in the sense that their funding is protected, if not augmented—there will be many more losers.

Losers: Low-Income Grad Students

For one, if you are a grad student in the next few years, you are going to pay more. 

As the economy grew worse and the job market dwindled, more and more recent college grads turned to graduate school in order to delay entry into the job market.  Now, in a semi-ironic twist, the debt ceiling bill mandates that those students are going to be called on to help improve the economy through the elimination of subsidized loans for grad students. 

This means that students will immediately begin accruing interest on their loans for school, rather than having that interest deferred until they graduate. Students will be allowed to borrow more through the unsubsidized loan program, in order to cover any gaps created by the elimination of the subsidized loans.  So, in short, they can borrow as much as ever, they’ll just pay more in interest, which the CBO estimates will save some $18.1 billion over the next decade. 

In addition, some student loan repayment incentives will be cut. The CBO estimates this will cut $3.6 billion over the next ten years.

Possible losers: Education and mass transit

Robert Ward, deputy director of the Rockefeller Institute of Government at SUNY, says that states take orders from Washington when the federal government is handing out money to go along with certain policy prescriptions.

"We saw that, for instance, in President Obama's education program and in President Bush's education program, Congress and the president in both cases provided new federal funding for education and in return they required states and localities to do certain things. As the federal government is looking to ratchet back its spending, it will necessarily, I think, have to reduce the imprint that it is trying to make from a policy perspective. So, among other things, this budget deal makes it likely that the federal government will have less to say about education in the future than it has been saying in recent years."

Ward predicts that mass transit may also take a hit, since it does not have broad support among many states, though some states, such as New York, would feel the effects of those cuts deeply.

Possible loser: Medicaid

Robert Ward also thinks it is likely that Medicaid will see some of its funding reduced.

"Social Security and Medicare are the most popular programs that the federal government operates. Medicaid is also important to a lot of people but not as politically popular, so it's hard to believe that Medicaid will not end up taking a hit."

A reduction to Medicaid would also be especially hard on New York, as nearly two-thirds of the federal funding the state receives goes towards its Medicaid program.

Winners: Watchdog Programs

Program Integrity Initiatives, which carefully screen Social Security and federal health care programs for waste, abuse and fraud, will see their spending increase under the new legislation, with the idea being that they will eliminate enough misuse to result in a net savings. The CBO estimates that savings from reduced benefit outlays from Social Security might save $12 billion over the next decade, and savings through health care fraud and abuse control would total about $3.7 billion.

Sort -of Winners: Low-Income Undergrads

College-bound students won’t get anymore help paying for college, but at least their programs will be offered some protections. Pell grants, which provide money to students who demonstrate financial need (up to $5.550 annually, as of right now) will be funded directly, rather than included as discretionary funding. This appears to be an attempt to free up more discretionary funds and possibly protect the Pell Grants, even as it increases direct spending by $17 billion.

Winners: War and Disaster

Yes, really. The caps on spending in the deal will not apply to spending for the wars in Iraq and Afghanistan, “or similar activities”, according to the CBO. This, even though the Congressional Research Service estimates that the war in Iraq costs the United States $806 billion for FY2011, and Afghanistan $444 billion, for a combined $1,250 billion.

Defense spending will not go unscathed, however, as for the fist time defense spending is seriously on the table as a potential area for spending cuts. The trigger provision includes cuts to defense, if no agreement can be reached on the committee’s recommendations.

Also a winner: disaster relief. In so far as the legislation provides for adjustment in the caps on discretionary spending to account for disaster relief and other emergency requirements, though that increase will be limited.

But at the End of the Day

These savings are all tiny compared to the total $2.1 trillion that the bill calls for.

The vast majority of savings will come through the cuts determined either by the joint committee or through the triggered cuts. The president himself pointed out that as a result of the deal, discretionary spending will be held to a much tighter standard than in the past, making that category of spending overall at its lowest level as a percentage of the economy since the fifties.

Back at the Concord Coalition, Robert Bixby says until the committee is appointed it’s hard to guess what they might do.

 “You can’t say at this point that it’s going to mean the cancellation of this that or the other weapons program or something, because Congress is going to have to make all that fit. So what they’re trying to do right now, is simply set some bottom line numbers here, and then the committees are going to have to figure out how to make them work.“

 

 

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Comments [6]

rem mills from Westfield,N.J.

Today, Thursday, August 4, 2011, the Dow lost 513.78 points, the largest one day point loss since the 778 lost in the financial crisis of 2008. This loss follows 8 out of the last 9 days of steady decline. The other indexes lost seriously also.

During the debt ceiling negotiations, the Tea Bagger wild eyed berserkers and other conservative Republicans assured us cutting the budget severely would bring job growth and prosperity. Almost every economist and other reputable expert said making serious budget cuts during a recession would harm the economy.

Now we face the lash of the markets because of Republican hubris and greed for private profits at the expense of the American people.Apparently Republicans live in an alternative universe where the usual economic laws don't apply.For them, ideology trumps facts and reality.

Other factors also caused this market plunge, such as financial problems in Europe and Japan and indicators of American economic decline. But it's not nice to fool economic Mother Nature.

Aug. 04 2011 11:31 PM
Ralph from Mahopac, NY

What happens next is more gridlock, but that may partially solve the problem. If Congress doesn't act the Bush tax cuts expire, all of them. If that happens our long national debt nightmare maybe close to an end, since it will increase revenues and cut the debt. Some may call this a tax increase and blame Obama, but they really should blame the people who voted for the sunset clause. They voted for it because they knew it would balloon the debt...mission accomplished

Aug. 04 2011 10:06 PM
jimmyjonesly from Boston

This Debt Deal was a dictatorship push. And now the rating agencies are still threatening to downgrade US debt.
This "super congress" is a coup on the constitution, and represents Obama's controller's push for a dictatorship.
Watch this, and join the fight for Obama's immediate ouster!
http://larouchepac.com/node/18977

Aug. 04 2011 12:22 PM
Lu from Brooklyn

Education will probably be a looser cause of cuts, but less mandate from DC could be a good thing, not a bad thing.

Aug. 04 2011 11:06 AM
Leah from Brooklyn

It clearly illustrates the lack of vision and planning necessary to make positive changes in this country in the long term and on a larger scale. (It is an interesting document to read though.)

Aug. 04 2011 10:44 AM

Sir;

Considering that we have a Congress which has managed to find a way to equate bribery with free speech, I see little reason to believe that it will not find a way to circumvent any part of this bill which, later on, it finds uncomfortable.

Aug. 04 2011 08:00 AM

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