CBO's Analysis of the Debt Ceiling Agreement

August 1, 2011

Last night President Obama and Congressional leaders reached an agreement on a measure that would reduce future budget deficits and raise the limit on the public debt in a series of steps. CBO has estimated the impact on deficits of the bill the Budget Control Act of 2011 as posted on the Web site of the House Committee on Rules on August 1, 2011.


(CBOs estimates of earlier versions of the legislation that were proposed in the House and Senate can be found here.)


What Are the Main Elements of the Legislation?


The legislation would:


  • Establish caps on discretionary spending through 2021;
  • Allow for certain amounts of additional spending for program integrity initiatives aimed at reducing the amount of improper benefit Payments;
  • Make changes to the Pell Grant and student loan programs;
  • Require that the House and the Senate vote on a joint resolution proposing a balanced budget amendment to the Constitution;
  • Establish a procedure to increase the debt limit by $400 billion initially and procedures that would allow the limit to be raised further 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 a Congressional Joint Select Committee on Deficit Reduction to propose further deficit reductions, with a stated goal of achieving at least $1.5 trillion in budgetary savings over 10 years; and
  • Establish automatic procedures for reducing spending by as much as $1.2 trillion if legislation originating with the new joint select committee does not achieve such savings.

Budgetary Effects in Brief


 


CBO estimates that the legislationapart from the provisions related to the joint select committeewould reduce budget deficits by $917 billion between 2012 and 2021. In addition, legislation originating with the joint select committee, or the automatic reductions in spending that would occur in the absence of such legislation, would reduce deficits by at least $1.2 trillion over the 10-year period. Therefore, the deficit reduction stemming from this legislation, including savings in debt service costs, would total at least $2.1 trillion over the 2012-2021 period.



Those amounts are relative to CBOs March 2011 baseline adjusted for subsequent appropriation action. CBO has also calculated the net budgetary impact if discretionary savings are measured relative to its January baseline projections. Relative to that baseline, CBO estimates that the legislation would reduce budget deficits by at least $2.3 trillion between 2012 and 2021.


Discretionary Caps


The legislation would impose caps on appropriations of new discretionary budget authority that start at $1,043 billion in 2012 and reach $1,234 billion in 2021. Those caps would not apply to spending for the wars in Afghanistan and Iraq and for similar activities (sometimes referred to as overseas contingency operations). In addition, the legislation provides for adjustments to the caps in each fiscal year to account for funding designated for emergency requirements and disaster relief and to allow additional funding for program integrity initiatives (discussed below).


Relative to the adjusted March baseline, proposed budget authority would be $840 billion lower and outlays would be $756 billion lower over the 2012-2021 period. Relative to the January baseline, excluding funding for the wars in Iraq and Afghanistan and for similar activities, the proposed caps would lower budget authority by nearly $1.1 trillion and outlays by $935 billion over the 2012-2021 period.


Congressional Joint Select Committee on Deficit Reduction


The legislation also would establish a Congressional Joint Select Committee on Deficit Reduction charged with a goal of reducing the deficit by at least $1.5 trillion between 2012 and 2021. If, by January 15, 2012, enactment of legislation originating with the joint select committee does not achieve an estimated $1.2 trillion in deficit reduction (including an allowance for interest savings), the bill would require reductions in both discretionary and direct spending to make up for any shortfall in that targeted savings. The composition of that $1.2 trillion over time and across budget categories would depend on the specific provisions of any legislation stemming from proposals of the joint select committee and the extent of any automatic reductions that would be triggered.


Program Integrity Initiatives


The legislation provides for adjustments to the discretionary spending caps to allow additional spending for program integrity initiatives aimed at reducing the amount of improper benefit payments for Disability Insurance (DI), Supplemental Security Income (SSI), and various health care programs (including Medicare, Medicaid, and the Childrens Health Insurance Program or CHIP). CBO estimates that the net savings associated with those programs, after accounting for the added spending stemming from those cap adjustments, would amount to about $1 billion over the 2012-2021 period. Additional savings would accrue after 2021. The projected net savings are small because much of the funding in excess of the caps would be necessary just to cover the program integrity spending already projected in CBOs baseline.


Other Changes in Direct Spending


The legislation also would amend the Higher Education Act of 1965 to appropriate additional funds for the federal Pell Grant program and make two changes to the Federal Student Loan Program. CBO estimates that, on net, those changes would reduce direct spending by about $5 billion over the 2012-2021 period.