Budget Control Act of 2011
The Budget Control Act of 2011
CBO’s current baseline projections show smaller deficits than the agency estimated earlier this year primarily because of the enactment of the Budget Control Act of 2011. Provisions in that act:
- Establish caps on discretionary funding through 2021;
- Allow certain amounts of additional spending for “program integrity” initiatives aimed at curtailing improper benefit payments;
- Change the Pell Grant and student loan programs;
- Require the House of Representatives and the Senate to vote on a joint resolution proposing a balanced budget amendment to the Constitution;
- Establish a procedure for increasing the debt limit by $400 billion initially and procedures to raise the limit again in two additional steps, for a cumulative increase of between $2.1 trillion and $2.4 trillion;
- Reinstate and modify certain budget process rules;
- Create the Congressional Joint Select Committee on Deficit Reduction to propose further reductions that will amount to at least $1.5 trillion in budgetary savings over 10 years; and
- Establish automatic procedures for reducing spending if legislation originating with the new deficit reduction committee does not achieve savings estimated to total at least $1.2 trillion.
Discretionary Caps. The Budget Control Act imposes caps on appropriations of new discretionary budget authority that start at $1,043 billion in 2012 and reach $1,234 billion in 2021. For 2012 and 2013, separate caps for “security” and “nonsecurity” budget authority will be in effect; from 2014 through 2021, only one cap will apply to total discretionary funding unless automatic spending reductions are triggered (as described below under “Enforcement Procedures”).13
The law allows for adjustments to the discretionary caps when appropriations are provided for certain purposes. Funding for the wars in Afghanistan and Iraq or similar activities (sometimes called overseas contingency operations) would lead to an increase in the caps, as would other funding designated as an emergency requirement. Furthermore, the law allows for an increase in the caps if additional budget authority is provided for program integrity initiatives aimed at reducing improper benefit payments in the Disability Insurance and Supplemental Security Income programs, Medicare, Medicaid, and the Children’s Health Insurance Program. Finally, the caps would be increased if appropriations were provided for disaster relief, but the adjustments would be limited on the basis of historical averages for such funding.
According to CBO’s estimates, if appropriations in the next 10 years are equal to the caps on discretionary spending, implementing those caps will reduce budget deficits by $756 billion between 2012 and 2021 (not counting the savings in interest payments that will result from lower outlays), compared with what would occur if discretionary budget authority was allowed to grow at the rate of inflation.
Overall Budgetary Impact of the Act. The law also made changes to education programs that will reduce mandatory outlays over the 2012–2021 period by $5 billion. The savings in interest on the public debt because of the lower deficits resulting from those changes and the discretionary caps will come to $134 billion, CBO estimates. In addition, CBO’s estimate of the budgetary impact of the law, as well as the agency’s August baseline projections, include further deficit reduction totaling $1.2 trillion over the 10-year period stemming from legislation originating with the deficit reduction committee or the automatic reductions in spending that will occur in the absence of such legislation. (As discussed on the following page, CBO estimates that enforcement of the act, in the absence of any enacted legislation stemming from the committee’s recommendations, would result in net savings of about $1.1 trillion over the coming decade.) The composition of that additional deficit reduction over time and across budget categories will depend on the specific provisions of any legislation stemming from the committee’s proposals and the extent of any automatic reductions that would be triggered. Overall, CBO’s baseline projections incorporate $2.1 trillion in deficit reduction over the 2012–2021 period stemming from the act.
Enforcement Procedures. If legislation originating from this Committee and estimated to produce at least $1.2 trillion in deficit reduction (including an allowance for interest savings) is not enacted by January 15, 2012, automatic procedures for cutting both discretionary and mandatory spending would take effect. The magnitude of those cuts would depend on any shortfall in the estimated effects of such legislation relative to the $1.2 trillion amount.
The automatic reductions – if triggered – would take the form of equal cuts (in dollar terms) in defense and nondefense spending starting in 2013. Those cuts would be achieved by lowering the caps on discretionary budget authority specified in the Budget Control Act and by automatically cancelling budgetary resources (a process known as sequestration) for some programs and activities financed by mandatory spending. The law exempts a significant portion of mandatory spending from sequestration, however. The total savings attributed to the automatic procedures would include lower debt-service costs resulting from those cuts.
CBO has estimated the changes in discretionary and mandatory spending that would occur if the automatic enforcement mechanisms were triggered because no new deficit reduction legislation was enacted. CBO’s analysis can only approximate the ultimate results; the Administration’s Office of Management and Budget would be responsible for implementing any such automatic reductions on the basis of its own estimates. CBO estimates that, if no legislation originating from this Committee was enacted, the automatic enforcement process specified in the Budget Control Act would produce the following results between 2013 and 2021:
- Reductions ranging from 10.0 percent (in 2013) to 8.5 percent (in 2021) in the caps on new discretionary appropriations for defense programs, yielding total outlay savings of $454 billion.
- Reductions ranging from 7.8 percent (in 2013) to 5.5 percent (in 2021) in the caps on new discretionary appropriations for nondefense programs, resulting in outlay savings of $294 billion.
- Reductions ranging from 10.0 percent (in 2013) to 8.5 percent (in 2021) in mandatory budgetary resources for nonexempt defense programs, generating savings of about $0.1 billion.
- Reductions of 2.0 percent each year in most Medicare spending because of the application of a special rule that applies to that program, producing savings of $123 billion, and reductions ranging from 7.8 percent (in 2013) to 5.5 percent (in 2021) in mandatory budgetary resources for other nonexempt nondefense programs and activities, yielding savings of $47 billion. Thus, savings in nondefense mandatory spending would total $170 billion.
- About $31 billion in outlays stemming from reductions in premiums for Part B of Medicare and other changes in spending that would result from the sequestration actions.
- An estimated reduction of $169 billion in debt-service costs.
In all, those automatic cuts would produce net budgetary savings of about $1.1 trillion over the 2013–2021 period, CBO estimates. That amount is lower than the $1.2 trillion figure for deficit reduction in the Budget Control Act for three reasons. First, because of the lag in timing between appropriations and subsequent expenditures, part of the savings from the automatic cuts in budgetary resources would occur after 2021. Second, CBO expects that some reductions—particularly those related to Medicare—would have other effects that would boost net spending (by the $31 billion mentioned above). Third, CBO estimates that the reduction in debt-service costs would be lower than the amount of such savings stipulated in the Budget Control Act.
The majority of the savings from the automatic spending reductions would stem from further cuts in discretionary spending (beyond those embodied in the new law’s caps on discretionary budget authority). CBO expects that about 71 percent of the net savings from the automatic procedures would come from lowering the caps on discretionary appropriations, 13 percent would come from a net reduction in mandatory spending, and 16 percent would result from lower debt-service costs.
Of course, the Budget Control Act could produce outcomes that are very different from the figures outlined above. The Congress could enact legislation originating from this Committee that would produce $1.2 trillion in savings through changes that differ significantly from the automatic reductions that would be required in the absence of such legislation. Or such legislation could yield some savings, but less than $1.2 trillion, so the automatic procedures would have a smaller impact than CBO has estimated here. Alternatively, this Committee could recommend, and the Congress could enact, legislation saving significantly more than $1.2 trillion. (The Budget Control Act states that the Committee’s goal is to achieve at least $1.5 trillion in savings over the 2012–2021 period.)
 Those earlier projections are shown in Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2012 (April 2011). For an analysis of the Budget Control Act of 2011, see Congressional Budget Office, letter to the Honorable John A. Boehner and the Honorable Harry Reid estimating the impact on the deficit of the Budget Control Act of 2011 (August 1, 2011). The estimates discussed here do not include the effect of initiatives in the Budget Control Act to enhance “program integrity,” which depend on future appropriations and will be incorporated into CBO’s baseline if they are implemented in the future.
 Budget authority (or “funding”) refers to the authority provided by law to incur financial obligations, which eventually result in outlays. For the purpose of enforcing the discretionary caps, the security category comprises discretionary appropriations for the Department of Defense, the Department of Homeland Security, the Department of Veterans Affairs, the National Nuclear Security Administration, the intelligence community management account (95-0401-0-1-054), and discretionary accounts in budget function 150 (international affairs). The nonsecurity category comprises all discretionary appropriations not included in the security category.
 That reduction in interest on the public debt is projected using CBO’s August 2011 forecast for interest rates. Those rates are lower than ones forecast earlier in the year and used in Congressional Budget Office, letter to the Honorable John A. Boehner and the Honorable Harry Reid estimating the impact on the deficit of the Budget Control Act of 2011.
 Discretionary spending refers to outlays from budget authority that is provided and controlled by appropriation acts. Mandatory spending refers to outlays from budget authority provided by laws other than appropriation acts.
 Budgetary resources consist of all sources of authority provided to federal agencies that permit them to incur financial obligations, including new budget authority, unobligated balances, direct spending authority, and obligation limitations.
 The Budget Control Act specifies that 18 percent of the $1.2 trillion goal for deficit reduction be assumed to result from debt-service savings; that amount comes to $216 billion. However, CBO estimates that the automatic spending reductions would produce debt-service savings of $169 billion through 2021.
 For further details, see Congressional Budget Office, Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act (September 2011).
CBO – Testimony, Statement of Douglas W. Elmendorf Director, Confronting the Nation’s Fiscal Policy Challenges, Joint Select Committee on Deficit Reduction U.S. Congress, September 13, 2011