Budget Control Act of 2011
The Budget Control Act of 2011 (Pub.L. 112–25, S. 365, 125 Stat. 240, enacted August 2, 2011) is a federal statute in the United States that was signed into law by President Barack Obama on August 2, 2011. The Act brought conclusion to the 2011 United States debt-ceiling crisis, which had threatened to lead the United States into sovereign default on or about August 3, 2011.
The law involves the introduction of several complex mechanisms, such as creation of the Congressional Joint Select Committee on Deficit Reduction (sometimes called the “super committee”), options for a balanced budget amendment and automatic budget sequestration.
- The debt ceiling was increased by $400 billion immediately.
- The President could request a further increase of $500 billion, which is subject to a congressional motion of disapproval which the President may veto, in which case a two-thirds majority in Congress would be needed to override the veto. This has been called the ‘McConnell mechanism’ after the Senate Minority Leader Mitch McConnell, who first suggested it as part of another scheme.
- The President could request a final increase of $1.2–1.5 trillion, subject to the same disapproval procedure. The exact amount depends on the amount of cuts in the “super committee” plan if it passes Congress, and whether a Balanced budget amendment has been passed.
- Spending was reduced more than the increase in the debt limit. No tax increases or other forms of increases in revenue above current law were included in the bill.
- The bill directly specified $917 billion of cuts over 10 years in exchange for the initial debt limit increase of $900 billion. This is the first installment (“tranche”) of cuts. $21 billion of this will be applied in the FY2012 budget.
- Additionally, the agreement established the Joint Select Committee on Deficit Reduction, sometimes called the “super committee”, to produce deficit reduction legislation by November 23, 2011, that would be immune from amendments or filibuster (similar to the Base Realignment and Closure). The goal of the legislation was to cut at least $1.5 trillion over the coming 10 years and be passed by December 23, 2011. Projected revenue from the committee’s legislation could not exceed the revenue budgeting baseline produced by current law. (Current law has the Bush tax cuts expiring at the end of 2012.) The committee would have 12 members, 6 from each party.
- The agreement also specified an incentive for Congress to act. If Congress failed to produce a deficit reduction bill with at least $1.2 trillion in cuts, then Congress could grant a $1.2 trillion increase in the debt ceiling but this would trigger across-the-board cuts (“sequestrations”), as of January 2, 2013. These cuts would apply to mandatory and discretionary spending in the years 2013 to 2021 and be in an amount equal to the difference between $1.2 trillion and the amount of deficit reduction enacted from the joint committee. There would be some exemptions: reductions would apply to Medicare providers, but not to Social Security, Medicaid, civil and military employee pay, or veterans. Medicare benefits would be limited to a 2% reduction.
- As originally envisioned, these caps would equally affect security and non-security programs. Security programs would include the U.S. Department of Defense, U.S. Department of Homeland Security, U.S. Department of Veterans Affairs, the National Nuclear Security Administration, some management functions of the intelligence community and international affairs from the U.S. State Department.However, because the Joint Select Committee did not report any legislation to Congress, the act reset these caps to defense (essentially the DOD) and non-defense categories. This became one of the important elements of the fiscal cliff.
Balanced Budget Amendment:
- Congress was required to vote on a balanced budget amendment between October 1, 2011, and the end of 2011, but is not required to pass it and send it to the states in order for the debt limit increases to occur. (This is unlike the previously proposed Cut, Cap and Balance Act, which was not enacted, which would have required Congress to actually pass such an amendment).
- Pell Grant funding was increased, but other financial aid was cut. Graduate and professional students were no longer eligible for interest subsidized loans.Repayment incentives will also be done away with after July 1, 2012.
- Section 106 of the Budget Control Act amends the Congressional Budget Act of 1974 to provide a two-year Senate budget, adopting in law what would usually be a Concurrent Resolution. Senate Budget Committee Chairman explains in this video.
The bill was the final chance in a series of proposals to resolve the 2011 United States debt-ceiling crisis, which featured bitter divisions between the parties and also pronounced splits within them. Earlier ideas included the Obama-Boehner $4 trillion “Grand Bargain”, the House Republican Cut, Cap and Balance Act, and the McConnell-Reid “Plan B” fallback. All eventually failed to gain enough general political or specific Congressional support to move into law, as the midnight August 2, 2011, deadline for an unprecedented U.S. sovereign default drew nearer and nearer.
Ultimately, the solution came from White House National Economic Council Director Gene Sperling, who, on July 12, 2011, proposed a compulsory trigger that would go into effect if another agreement was not made on tax increases and/or budget cuts equal to or greater than the the debt ceiling increase by a future date. The intent was to secure the commitment of both sides to future negotiation by means of an enforcement mechanism that would be unpalatable to Republicans and Democrats alike. President Obama agreed to the plan. House Speaker John Boehner expressed reservations, but also agreed.
On July 26, 2011, White House Budget Director Jack Lew and White House Legislative Affairs Director Rob Nabors met with Senate Majority Leader Harry Reid to discuss the plan. Reid, like Boehner several days before, was initially opposed to the idea, but was eventually convinced to go along with it, with the understanding that the sequester was intended as an enforcement tool rather than a true budget proposal.
On the evening of July 31, 2011, Obama announced that the leaders of both parties in both chambers had reached an agreement that would reduce the deficit and avoid default. The same day, Speaker of the House John Boehner‘s office outlined the agreement for House Republicans. One key element in the deal being reached and the logjam being broken earlier that afternoon was U.S. Vice President Joe Biden‘s ability to negotiate with his 25-year Senate colleague, Senate Minority Leader Mitch McConnell. Biden had spent the most time bargaining with Congress on the debt question of anyone in the administration, and McConnell had viewed him as the one most trustworthy.
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President Obama signed the bill shortly after it was passed by the Senate. In doing so, the president said, “Is this the deal I would have preferred? No. But this compromise does make a serious down payment on the deficit reduction we need, and gives each party a strong incentive to get a balanced plan done before the end of the year.”
The vote of disapproval on the $500 billion request failed in the Senate by a vote of 45–52. So regardless of a House vote of disapproval the $500 billion increase in the debt ceiling will occur when the 50 days after the request to increase the ceiling expires.
On November 18, 2011, the balanced budget amendment failed to advance in the House: 261–165, 23 votes short of the needed 2/3 majority. On December 14, 2011, two proposed Balanced Budget Amendments failed in the Senate, 21–79 and 47–53.
On November 21, 2011, the Joint Select Committee on Deficit Reduction announced that it was not able to advance any legislation to the full Congress, issuing a statement that began with the following: “After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline.”
Projected and known impacts
The act will not actually reduce the nominal U.S. debt over the 10-year period. But it will reduce the real (inflation adjusted) growth of the debt, by reducing real Federal spending (the amount of spending with inflation included). However, every plan will increase or keep constant nominal spending. That is partly because the cuts due to the act will not reduce federal spending in contemporary dollars, but rather reduce the year-to-year increases in spending from what had previously been anticipated.Even with the slowdown, both federal spending and the debt were still projected to grow faster than the U.S. economy, due to the cost curve effects of health care, which the act does not address. However, it is hoped that an independent cost-cutting board created by the Affordable Care and Patient Protection Act will begin to reduce per capital health spending once it is implemented in 2014.
The debate on the bill was driven by the Republicans’ insistence on spending cuts as their condition for agreeing to raise the debt ceiling. This raised concern because of the relationship between aggregate demand and unemployment; as Patrick Lunsford, Senior Editor of insideARM.com stated in a Forbes magazine blog, “when government spending is slashed, jobs are lost and consumer demand falls.” In analyzing the specific bill that emerged, the Economic Policy Institute stated, “The spending cuts in 2012 and the failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer people choosing to work in 2012, relative to current budget policy.” Most of the $900 billion in the first tranche of cuts occur in future years and so will not remove significant aggregate demand from the economy in the current and following year.Only $25 billion in federal discretionary spending is required to be removed for 2012.Regarding the across the board cuts, these will take place in Spring 2012 unless the Republicans in the US House can agree a substitute with the Democratic President and US Senate. Some top Republicans were particularly concerned that any defense cuts could not go into effect until after 2013.
Passage of the Budget Control Act of 2011 was not enough to avert, three days later, Standard & Poor’s downgrading the nation’s credit rating for the first time in the firm’s history, from “AAA” (highest) to “AA+” (highest, with qualifications).They said they were “pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics anytime soon.”(The United States Department of the Treasury pointed out an error of $2 trillion in Standard & Poor’s calculation of the ten-year deficit reduction under the Act, and commented, “The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.”) S&P has partially disputed this claim of error, arguing that it is not as substantial as the Department of the Treasury is asserting, stating, “In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP).” They further state that they used a spending inflation rate of only 5 percent in their calculations which is actually lower than the 7 percent spending inflation rate the Budget Control Act of 2011 assumes.
2012 election and layoff impacts
A 1988 Federal law requires most United States employers with 100 or more employees to provide sixty- (60) calendar-day advance notification of plant closings and mass layoffs of employees. With the scheduled sequestration reductions in Federal spending required by the Budget Control Act of 2011 due to take effect on January 2, 2013, several U.S. companies with large Federal contracts began to publicly discuss in the summer of 2012 the required layoffs that would be required to bring their workforce into line with the reductions in Federal spending.
Some companies have publicly stated that they would not send out the required notices, based on White House assurances, despite no change to the underlying Federal law. In October 2012, Lockheed Martin announced that they would not send out Worker Adjustment and Retraining Notification Act letters in 2012 in anticipation of sequestration cuts.Additionally, in September 2012, the Obama Administration, released a report stating that sequestration is bad policy, and that Congress can and should take action to avoid it by passing a comprehensive and balanced deficit reduction package.
After several months of denying that they could or would plan for the implementation of sequestration cuts, the Department of Defense finally began such planning in December 2012, with less than one month to go.
The start of the sequestration was delayed from January 2, 2013 to March 1, 2013 by the American Taxpayer Relief Act of 2012, which was passed by both houses of Congress on January 1, 2013 as a partial resolution to the fiscal cliff crisis.
What is sequestration?
It’s a series of automatic, across-the-board cuts to government agencies, totaling $1.2 trillion over 10 years. The cuts would be split 50-50 between defense and domestic discretionary spending.
It’s all part of attempts to get a handle on the growth of the U.S. national debt, which exploded upward when the 2007 recession hit and now stands at more than $16 trillion. The sequester has been coming for more than a year, with Congress pushing it back to March 1 as part of the fiscal cliff deal at the end of the last session.
Why does this seem familiar?
It started with the 2011 standoff over the U.S. debt ceiling, when Republicans in Congress demanded spending cuts in exchange for giving the Obama administration the needed legal headroom to pay the federal government’s obligations to its bondholders. In the end, Congress and the administration agreed to more than $2 trillion in cuts. About $1 trillion of that was laid out in the debt-ceiling bill and the rest imposed through sequestration — a kind of fiscal doomsday device that Congress would have to disarm by coming up with an equal amount of spending reductions elsewhere.
What were they thinking?
The plan was that a special congressional panel, dubbed the “super committee,” would find a less painful way to cut spending. It failed in November 2011. That left federal agencies facing what outgoing Defense Secretary Leon Panetta called “legislative madness” in the form of harsh cuts that no one wanted.
“For those of you who have ever seen ‘Blazing Saddles,’ it is the scene of the sheriff putting the gun to his head in order to establish law and order,” Panetta said in a speech at Washington’s Georgetown University. “That is sequestration.”
But for many conservatives, sequestration is a feature, not a bug. It’s “the first chance we have for real savings and deficit reduction,” the tea party-aligned lobbying group FreedomWorks tells supporters on its website.
“President Obama already agreed to the sequester savings when he signed the debt ceiling bargain into law,” FreedomWorks says. “He needs to follow through.”
Where will the cuts fall?
More than $500 billion will be cut from the Defense Department and other national security agencies, with the rest cut on the domestic side — national parks, federal courts, the FBI, food inspections and housing aid. While the Pentagon has laid out plans ranging from furloughs of hundreds of thousands of civilian workers to combat readiness training and weapons maintenance, the White House budget office hasn’t specified which domestic agencies would take the biggest hits.
Panetta says that the $46 billion in spending cuts for 2013 would cut sharply into military readiness — and the longer the cuts are pushed back, the deeper they’ll have to be to achieve the required savings.
So now what?
Congress put off the sequester until March 1 as part of the last-minute fiscal cliff deal on New Year’s Day. Without that agreement, economists warned that the one-two punch of sequestration and the expiration of the 2001 and 2003 Bush tax cuts could have thrown a still-struggling U.S. economy into reverse.
Even with the fiscal cliff deal, the austerity moves already were slowing the economy, Obama suggested over the weekend. The Commerce Department said a large cut in federal spending, primarily on defense, contributed to the 0.1% decrease in gross domestic product seen in the last quarter of 2012.
“Washington cannot continually operate under a cloud of crisis. That freezes up consumers,” Obama said during a pre-Super Bowl interview with CBS. “It gets businesses worried. We can’t afford these self-inflicted wounds.”
Tuesday, Obama urged Congress to pass a short-term deal that puts off the cuts, allowing some breathing room for a long-term deficit reduction plan. But Obama said any deal should include more revenue from ending some tax breaks — a stance that inflamed Republicans who already had to swallow a tax increase for top earners in the fiscal cliff deal.
“I don’t like the sequester. I think it’s taking a meat ax to our government, a meat ax to many programs that will weaken our national defense,” House Speaker John Boehner, R-Ohio, said Wednesday. But, he added, “Americans do not support sacrificing real spending cuts for more tax hikes.”