The Debt Ceiling and the Budget Control Act of 2011

The Debt Limit

The 2011 Debt Debate

Budget Control Act of 2011

Impact on COGD

The Ryan Budget: The Road to Prosperity

The Debt Limit

The debt limit is ostensibly a means to restrain spending by statutorily limiting the amount of borrowing the federal government may do. When the government has reached the limit it is forced to either extend its borrowing abilities or revisit its spending habits. In 2011, the Treasury department threatened it would have to dip into social security, military spending or Medicare to keep the United States from defaulting on its obligations. Previously, the threat of this kind of austerity has relegated the debt limit to little more than a leaking point—every time the government got close to its borrowing limits, it would simply raise the debt ceiling, absolving itself from the spending restraint a limit on the debt is supposed to instill. Fortunately, the tide turned for taxpayers during the debt limit debate in 2011.

The 2011 Debt Debate

Importantly, the debt limit debate in 2011 was defined by the fact that there was an actual debate—the debt ceiling has been raised ten times since 2001 without a single effort to address the crisis of habitual deficit spending. Instead, after unilaterally refusing to allow tax hikes as a part of the final deal, House Republicans established a new standard for extended borrowing authority. Referred to as the “Boehner Rule” after Speaker of the House John Boehner, the new standard requires that any increase in the debt ceiling must be met with an equal, or greater, dollar amount of spending cuts. On August 2, the Budget Control Act of 2011 was signed into law, cementing this standard. With zero tax hikes, the BCA requires cuts to spending that exceed the increase on the debt limit, spending caps that will control future spending, a vote on a Balanced Budget Amendment (BBA) to the Constitution, and the establishment of the Joint Committee on Deficit Reduction (JCDR).

Budget Control Act of 2011

The increase in the debt limit came in two installments. The Budget Control Act of 2011 placed caps on discretionary spending, which would reduce spending by an approximated $900 billion. With the implementation of the act came the immediate, first, increase of $400 billion to the debt limit. The second increase, of $500 billion, required both chambers to vote on a Balanced Budget Amendment (BBA) before it was approved.

The Act then created a Joint Committee on Deficit Reduction charging 12 lawmakers with finding up to $1.5 trillion in savings over the next ten years. If the JCDR approved additional deficit reduction of at least $1.2 trillion, the debt ceiling could be increased by $1.5 trillion. If the JCDR offered savings of anything less than the scheduled $1.2 trillion, the debt ceiling could only be increased by $1.2 trillion. However, the BCA states that at least $1.2 trillion in savings must be realized – so a sequester was put in place to ensure that if the JCDR came up with less than that amount, an across-the-board cut would make up the difference. Similarly, if the JCDR did not offer any savings, a sequestration would take effect for the full $1.2 trillion.

The Joint Committee was required to report its savings by November 23, 2011. It failed to offer any plan to cut spending, triggering a sequester to take place starting in 2013. The sequester will cut $1.2 trillion in spending; the same amount by which the debt limit may now be increased.

With the BCA, taxpayers were awarded almost $1 trillion in spending cuts with caps placed on discretionary spending. This represented a huge step forward after years of bailouts, “stimulus” spending plans and bloated omnibus spending bills. Importantly, a new metric was established that keeps the focus on the real fiscal problem—government spending. By implementing the “Boehner Rule,” and upholding a firm commitment to not increasing taxes, the debt limit debate in 2011 bodes well for taxpayers in years to come.

Impact on COGD

CBO reports discretionary spending in 2011 was $1,346 billion and $1,308 billion in 2012, for an overall reduction in spending of $38 billion. Without the Budget Control Act of 2011 this reduction in discretionary spending would have saved the American public .88 days, or 21.3 hours in terms of COGD. The first $917 billion in savings from the discretionary caps in the BCA will save taxpayers 21.4 days. The $1.2 trillion in savings from the sequester amounts to a spending reduction equal to 2.8 days for 2012.

The Budget Control Act of 2011 avoided a debt crisis without raising taxes. It lays the groundwork for lasting restraint in government spending, necessary to reduce the deficit and promote economic growth.


The Ryan Budget: The Road to Prosperity

The House Budget Committee has offered some of the most serious proposals of the past few years to avert a spending-driven economic crisis. Provisions under the FY 2013 Budget will cut spending by $6 trillion over the next ten years and bring spending below the historical average of 21 percent of GDP by 2016. The plan saves entitlement programs by giving states more flexibility in welfare and Medicaid spending and allows taxpayers to invest in their own healthcare. Additionally, it requires pro-growth tax reform, cutting individual and corporate tax rates.

How does it Replace the Sequester?

After the Joint Committee on Deficit Reduction was unable to propose a plan to cut spending as laid out in the Budget Control Act of 2011, an automatic sequester is required to take effect in 2013, a scheduled $109 billion cut to discretionary spending. The Road to Prosperity reprioritizes the sequester savings by targeting mandatory spending. It instructs six committees with jurisdiction over mandatory spending programs to find savings beyond those of the intended sequester through a process known as reconciliation. The six committees are: Agriculture, Energy & Commerce, Financial Services, Judiciary, Oversight and Government Reform, and Ways & Means. Between the six committees, they will produce at least $18 billion of deficit reduction in 2013.46 The budget calls for reforms with Medicare, Medicaid and other entitlement programs as follows:

While the Congressional Budget Office is required by law to score legislation on a static basis, taking a more realistic look at the House Republican budget gives a clearer picture of how its reforms could restore solvency in federal finance. When the positive economic effects of pro-growth tax reform are taken into account, the federal budget could be balanced in the mid-to-early 2020s. CBO notes that “the debt that would occur under the paths specified by the Chairman and his staff would lead to higher national income over the long run.

Impact on COGD

The Paul Ryan Budget Plan cuts federal spending by $5 trillion over the next decade. We find that laborers in America will save 87.94 days of work over the next ten years under the House FY 2013 Budget.53 Under the House Republican Budget proposal, Americans are put back on the path to prosperity for generations to come.

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