How the debt deal will really work

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  • Obama and #Congress only settled on how much spending to cut - appropriation and joint committees decide what to cut

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  • White House will likely push for more federal #spending to rev up the economy before the #election #debtdeal

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  • Debt limit is likely to bumped up again in 2013

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Most financial analysts breathed a sigh of relief when the president signed the Budget Control Act into law just a few hours before we hit the limit on the national credit card. But that was premature. The new budget law does little more than establish a process by which our fiscal crisis may be addressed, and there are ample opportunities for that process to be overturned. If that does happen, we can look forward to another debt-driven political crisis in 2013.

The new budget law raises the amount that the government can borrow in two steps, from $14.3 trillion to $16.4 trillion, in exchange for an equivalent reduction in federal spending. The president and Congress only settled how much to cut, not what to cut, in the debt deal. The appropriations committees and a new joint committee are tasked with the dirty work.

In the first round of budget cutting tied to an increased debt limit, outlays are capped for discretionary programs (which include everything from education to veterans programs). Appropriations committees are supposed to find specific program cuts to reach the $917 billion in savings expected over the next decade from discretionary programs. That means cutting spending in defense and numerous domestic programs, but not Social Security, Medicare, Medicaid and other entitlement programs.

In the second round, a new joint committee comprised of 12 members from the House and the Senate is supposed to find at least $1.2 trillion in savings that are to accrue between 2013 and 2021. Anything is fair game for the committee, including cuts in entitlements and increases in taxes.

"Unless there's a change at the White House, that means a replay of this year's bitter dispute over debt and fiscal policy, and Republicans will demand a better deal than they got this year." -- Joseph Antos

It seems unlikely that the joint committee will be able to fulfill its mission. The political and philosophical divide between Democrats and Republicans is as great as it has ever been. The left demands protection for the big social programs, and the right will not consider tax increases. We are already in the midst of presidential election season, which further inhibits attempts at compromise. The odds are low that the joint committee can settle on a plan, and even lower that the full Congress would pass it.

That failure triggers a sequester, which substitutes across-the-board spending reductions for nuanced policy. This approach succeeded in reining in federal spending under the Gramm-Rudman-Hollings law and the Budget Enforcement Act during the late 1980s and early 1990s. It could work again, but only as a stop-gap measure that might buy enough time for policymakers to develop a consensus around sustainable policy.

Despite assertions that the debt deal locked in a down payment on significant deficit reduction, the Budget Control Act does not bind future Congresses to agreements reached this year. If the next Congress agrees with the deficit-cutting priorities established in the new budget law, those spending reductions will be taken. But there is nothing to stop future policymakers from circumventing the spending limitations imposed this year.

Given this uncertainty, what should we expect?

First, the $103 billion in spending cuts from the discretionary caps estimated by the Congressional Budget Office for 2012 are locked in place. That is a respectable 7.7 percent budget cut from CBO's March baseline. After having agreed to the terms of the Budget Control Act, this Congress will not have the chutzpah to back out not matter how much they might wish to.

Second, the $126 billion saved in 2013 due to discretionary caps are virtually certain. Appropriations for 2013 will not be settled until late next year, giving Congress an opportunity to adjust the target. Although there is likely to be another push from the White House for more federal spending in the hope of revving up the economy in time for the election, House Republicans will not go along.

Third, the sequester process will be initiated in 2013, reducing spending by an additional $109 billion. The Medicare contribution will be two percent of program outlays, or about $12 billion--a far gentler cut than the joint committee is likely to recommend. The rest of the budget savings will be split evenly between defense and non-defense programs, which face a 16.4 percent cut from CBO's baseline--more than double the 2012 cut. Long-time budget expert Keith Hennessey points out that at least 15 new programs created by the Affordable Care Act would take their share of the cuts.

Fourth, we will bump up against the now-larger debt limit again in 2013. It is likely that Republicans will hold their majority in the House, and they may well gain a majority in the Senate (although not the 60 seats it takes to enact any significant legislation). Unless there's a change at the White House, that means a replay of this year's bitter dispute over debt and fiscal policy, and Republicans will demand a better deal than they got this year. However, if Barack Obama is still president, he will not be running again and may be less willing to make a deal.

The prospect of a long-term sequester is too horrifying for either Republicans or Democrats to contemplate, but they need to feel its sting in 2013. Republicans do not want to see national security compromised by deep cuts, and Democrats want to preserve the gains they made with health reform. Social Security, Medicare, Medicaid, and taxes will all be on the table. Eventually both sides will compromise, but only because they will have no other choice.

Joe Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI.

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