September 12, 2011
The Budget Control Act of 2011 (enacted on August 2 as Public Law 112-25) made several changes to federal programs and established budget enforcement mechanisms—including caps on future discretionary appropriations—that were estimated to reduce federal budget deficits by a total of at least $2.1 trillion over the 2012–2021 period. The caps on discretionary appropriations will decrease spending (including debt service) by an estimated $0.9 trillion during that period, compared with what such spending would have been if annual appropriations had grown at the rate of inflation. (CBO released an analysis of the new law last month.)
At least another $1.2 trillion in deficit reduction was anticipated from provisions related to a newly established Congressional Joint Select Committee on Deficit Reduction. That committee is charged with proposing legislation to trim budget deficits by at least $1.5 trillion between 2012 and 2021. However, if legislation originating from the 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 will 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.
In an analysis released this afternoon, 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’s Estimates of Automatic Reductions in Budgetary Resources
The automatic reductions—if triggered—would take the form of equal cuts (in dollar terms) in defense and nondefense spending starting in fiscal year 2013. The majority of the savings—or 71 percent—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).
A much smaller amount of the savings—13 percent—would come from a net reduction in mandatory spending by automatically cancelling budgetary resources (a process known as sequestration). The law exempts a significant portion of mandatory spending—for programs such as Social Security and Medicaid—from sequestration, and has a special rule that limits the reductions in spending for Medicare. The remaining savings—16 percent—would result from lower debt-service costs.
On a yearly basis, CBO estimates that, if no legislation originating from the deficit reduction 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 the 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.
Estimated Impact of Budget Enforcement Mechanisms on Future Deficits
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.
Of course, the Budget Control Act could produce outcomes that are very different than the figures outlined above. The Congress could enact legislation originating from the deficit reduction 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, the deficit reduction 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.)