The Budget Control Act of 2011 The New Debt Deal Presenter: Ann Sullivan, Madison Services Group, Inc. Date: August 2, 2011

The Budget Control Act of 2011 Overview Terms Projections Debt Ceiling Increase Balanced – Budget Amendment Spending Cuts – First Round Spending Cuts – Second Round Enforcement Triggers Entitlement Cuts and Taxes Conclusion

Overview Debate centers around the amount of increase of the debt ceiling and a dollar for dollar decrease in the deficit Sticking point was how to lower the deficit—by spending cuts, by increasing tax revenues or a combination of both The front end of this plan lowers the deficit by spending cuts. The second part of the plan allows for a combination of taxes and spending cuts. Up to a super committee of 12 to decide

Terms Security spending – includes spending on Department of Defense, Homeland Security, Veteran’s Affairs, Intelligence community, International Affairs Non-security spending – all other types of spending not related to security. Does not include Social Security, Medicare, or Medicaid Discretionary spending – spending through appropriations bills. Mandatory spending – spending on certain programs which Congress must spend under current law CBO – Congressional Budget Office – Non partisan office funded by Congress in charge of analyzing and projecting the economic implications of legislative initiatives and budgets

Projections Debt ceiling will need to be raised $2.1 – 2.4 trillion by 2013 – Will be raised $400 billion automatically in Fall 2011 – Will be raised an extra $500 billion before December 31, 2011 unless Congress disapproves – Will be raised $1.2 – 1.5 trillion at end of 2011 – Raises in debt ceiling will be matched dollar for dollar with spending cuts and possible revenue increases Two ways to raise debt ceiling to meet $2.1 – 2.4 trillion request: constitutional amendment or Congressional approval Two ways to cut spending to meet dollar for dollar match: acceptance of supercommittee’s savings recommendation or across the board budget cuts CBO estimates the Budget Control Act will save at least $2.1 trillion from 2012 – 2021

Debt Ceiling Increase Two Step Process to increase $14.3 trillion debt ceiling by $2.1 – 2.4 trillion over two years – First step: $900 billion increase in debt ceiling Treasury can access $400 billion in borrowing immediately Debt ceiling would automatically raise by $500 billion after December 31, 2011 unless Congress passes a resolution of disapproval - requires a 2/3 vote – Second step: Remaining $1.2 – 1.5 trillion anticipated increase in debt ceiling through 2012 Actual amount of increase depends on actions taken by Congress this Fall Debt ceiling will automatically increase $1.5 trillion if a balanced budget amendment is passed by 2/3 of Congress Under Compromise

Balanced-Budget Amendment Plan requires both House and Senate to vote on a proposed balanced-budget amendment (joint resolution) to the Constitution by the end of 2011 If passed by 2/3 of Congress, debt ceiling is automatically raised by another $1.5 trillion To become Constitutional Amendment, ¾ states must ratify it

Spending Cuts – First Round These match the debt ceiling increases dollar for dollar Immediate spending cuts of about $917 billion over 10 years – Set discretionary spending caps over which Congress cannot spend – Of the $917 billion, 38 % ($350 billion) cut from security over 10 years – Firewall between security and non-security spending Can’t mix and match funds – can’t take security from a non- security program fund Does not assume any savings from winding down Iraq and Afghanistan wars

Spending Cuts – Second Round Special joint committee of 12 to propose further cuts/tax increases of $1.5 trillion, the remaining amount needed to balance the $2.1 – 2.4 trillion debt ceiling increase – President Obama will appoint 3 Republicans and 3 Democrats from both the House and Senate – For recommendation to pass, it needs equally divided support from 1/3 of the committee – Recommendation subject to simple majority vote without amendment – Each chamber must vote before December 23, 2011 By December 23, 2011

Spending Cuts – Second Round Mandate and Goal of Special Committee – Mandate: Make recommendations to meaningfully improve short- and long-term fiscal imbalance – Goal: Cut deficit to match debt ceiling increases dollar for dollar Recommendations should cut deficit $1.5 trillion by 2021 (over 10 years) Will look at cuts to Medicare, farm subsidies, educational assistance, and retirement benefits for federal workers If Congress does not accept the recommendations, or the committee cannot recommend a plan to save at least $1.2 trillion over 10 years, it would trigger the enforcement mechanism

Enforcement Trigger for Panel’s Recommendations Similar to 1985 Gramm-Rudman anti-deficit law – Goal of law was to cut the budget deficit in 1985, which at the time was the largest in history – Enacted automatic spending cuts (called sequesters) if the deficit exceeded spending targets – Produced the first balanced federal budget in a quarter of a century

Details of Enforcement Trigger for Panel’s Recommendations Goal is to come up with 1.5 trillion in savings. If recommendations do not produce at least $1.2 trillion in savings over 10 years… – Automatic across-the-board cuts would be enacted to reconcile the difference to $1.2 trillion in savings, split 50/50 between security and non-security programs (about $500 billion over ten years for each category) – Affected non-security programs: farm price supports, Social Services block grants, mineral leasing payments to states, other smaller spending programs – Exempt non-security programs: Social Security, Medicaid – Medicare cuts Maximum payment cut of 2% of Medicare outlays to Medicare providers. (A cut of about $14 billion) Would only affect payment to providers, not beneficiaries

Entitlement Cuts and Taxes Supercommittee is likely to look closely at entitlement spending to reach its goal of $1.5 trillion in savings Plan does not include any immediate increase in revenue, but committee may consider several forms of revenue increases – Restructuring of tax code – Elimination of tax breaks – Allow Bush tax cuts for high earners to expire in 2013 One exception to cuts, however: Pell Grants have increased from $3.1 billion to $13.1 billion; an increase of 10 billion but cut direct Stafford loans for graduate and professional students

Conclusion Actions by the Congress – House passed the Budget Control Act of 2011 on August 1, 2011 with a 269 – 161 vote Yea: 174 Republicans, 95 Democrats Nay: 66 Republicans, 95 Democrats – Senate passed the debt deal on August 2, 2011 with a 74 – 26 vote Yea: 28 Republicans, 45 Democrats Nay: 19 Republicans, 6 Democrats, 1 Independent President Obama expected to sign bill