Budget Control Act of 2011
Encyclopedia
The Budget Control Act of 2011 was passed by the 112th United States Congress
signed into law by President
Barack Obama
. It brought conclusion to the 2011 United States debt ceiling crisis, which had threatened to lead the United States into sovereign default
on or about August 3, 2011.
The law involves the introduction of several complex mechanisms, such as creation of the Congressional Joint Select Committee on Deficit Reduction
(sometimes called the "super committee") and options for a Balanced Budget Amendment
.
Deficit reduction:
Balanced Budget Amendment:
Other provisions:
, and the McConnell-Reid "Plan B" fallback. All eventually failed to gain enough general political or specific Congressional support to move into law, as the midnight August 2, 2011, deadline for an unprecedented U.S. sovereign default drew nearer and nearer.
On the evening of July 31, 2011, Obama announced that the leaders of both parties in both chambers had reached an agreement that would reduce the deficit and avoid default. The same day, Speaker of the House John Boehner
's office outlined the agreement for House Republicans. One key element in the deal being reached and the logjam being broken earlier that afternoon was U.S. Vice President Joe Biden
's ability to negotiate with his 25-year Senate colleague, Senate Minority Leader Mitch McConnell
. Biden had spent the most time bargaining with Congress on the debt question of anyone in the administration, and McConnell had viewed him as the one most trustworthy.
made her first appearance back on the floor of Congress following the near-fatal assassination attempt upon her in the 2011 Tucson shooting
; she voted in favor of the bill. Giffords received prolonged, loud applause from her colleagues and said in a statement, "I had to be here for this vote."
On November 18, 2011, the Balanced Budget Amendment
failed to advance in the House: 261–165
, 23 votes short of the needed 2/3 majority.
effects of health care, which the act does not address.
The debate on the bill was driven by the Republicans' insistence on spending cuts as their condition for agreeing to raise the debt ceiling. This raised concern because of the relationship between aggregate demand
and unemployment; as Patrick Lunsford, Senior Editor of insideARM.com stated in a Forbes
magazine blog, "when government spending is slashed, jobs are lost and consumer demand falls." During the debate over the bill, economists across ideologies agreed that reducing spending during a recession would likely make unemployment worse. In analyzing the specific bill that emerged, the nonpartisan Economic Policy Institute
stated, "The spending cuts in 2012 and the failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer jobs in 2012, relative to current budget policy."
Most of the $900 billion in the first tranche of cuts occur in future years and so will not remove significant aggregate demand from the economy in the current and following year. Only $25 billion in federal discretionary spending is required to be removed for 2012. Regarding the across the board cuts, these could not take place until 2013 and so if triggered, a new Congress could vote to eliminate or deepen all or part of them. Some top Republicans were particularly concerned that any defense cuts could not go into effect until after 2013.
Passage of the Budget Control Act of 2011 was not enough to avert, three days later, Standard & Poor's downgrading the nation's credit rating for the first time in the firm's history, from "AAA" (highest) to "AA+" (highest, with qualifications). They said they were "pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics anytime soon." (The United States Department of the Treasury
pointed out an error of $2 trillion in Standard & Poor's calculation of the ten-year deficit reduction under the Act, and commented, "The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.")
S&P has partially disputed this claim of error, arguing that it is not as substantial as the Department of the Treasury is asserting, stating, "In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP)." They further state that they used a spending inflation rate of only 5 percent in their calculations which is actually lower than the 7 percent spending inflation rate the Budget Control Act of 2011 assumes.
112th United States Congress
The One Hundred Twelfth United States Congress is the current meeting of the legislative branch of the United States federal government, composed of the United States Senate and the United States House of Representatives. It convened in Washington, D.C. on January 3, 2011, and will end on January...
signed into law by President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
. It brought conclusion to the 2011 United States debt ceiling crisis, which had threatened to lead the United States into sovereign default
Sovereign default
A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. It may be accompanied by a formal declaration of a government not to pay or only partially pay its debts , or the de facto cessation of due payments...
on or about August 3, 2011.
The law involves the introduction of several complex mechanisms, such as creation of the Congressional Joint Select Committee on Deficit Reduction
United States Congress Joint Select Committee on Deficit Reduction
The Joint Select Committee on Deficit Reduction, colloquially referred to as the Supercommittee, is a joint select committee of the United States Congress, created by the Budget Control Act of 2011 on August 2, 2011...
(sometimes called the "super committee") and options for a Balanced Budget Amendment
Balanced Budget Amendment
A balanced-budget amendment is a constitutional rule requiring that the state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government....
.
Provisions
Debt limit:- The debt limit was increased by $400 billion immediately.
- The President may request a further increase of $500 billion, which is subject to a congressional motion of disapproval which the President may veto, in which case a two-thirds majority in Congress would be needed to override the veto. This has been called the 'McConnell mechanism' after the Senate Minority Leader Mitch McConnellMitch McConnellAddison Mitchell "Mitch" McConnell, Jr. is the senior United States Senator from Kentucky and the Republican Minority Leader.- Early life, education, and military service :...
, who first suggested it as part of another scheme. - The President may request a final increase of $1.2–1.5 trillion, subject to the same disapproval procedure. The exact amount depends on the amount of cuts in the "super committee" plan if it passes Congress, and whether a Balanced Budget AmendmentBalanced Budget AmendmentA balanced-budget amendment is a constitutional rule requiring that the state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government....
has been passed.
Deficit reduction:
- Spending is reduced more than the increase in the debt limit. No tax increases or other forms of increases in revenue above current law are included in the bill.
- The bill directly specifies $917 billion of cuts over 10 years in exchange the initial debt limit increase of $900 billion. This is the first installment ("tranche") of cuts. $21 billion of this will be applied in the FY2012 budget2012 United States federal budgetThe 2012 United States federal budget is the United States federal budget to fund government operations for the fiscal year 2012, which is October 2011–September 2012...
. - Additionally, the agreement establishes the Joint Select Committee on Deficit Reduction, sometimes called the "super committee", that would produce debt reduction legislation by November 23, 2011, that would be immune from amendments or filibuster (similar to the Base Realignment and ClosureBase Realignment and ClosureBase Realignment and Closure is a process of the United States federal government directed at the administration and operation of the Armed Forces, used by the United States Department of Defense and Congress to close excess military installations and realign the total asset inventory to reduce...
). The goal of the legislation is to cut at least $1.5 trillion over the coming 10 years and be passed by December 23, 2011. Projected revenue from the committee's legislation must not exceed the revenue budgeting baselineBaseline (Budgeting)Baseline budgeting is a method of developing a budget which uses existing spending levels as the basis for establishing future funding requirements. The concept assumes that the organization is generally headed in the right direction and only minor changes in spending levels will be required...
produced by current law. (Current law has the Bush tax cutsBush tax cutsThe Bush tax cuts refers to changes to the United States tax code passed during the presidency of George W. Bush and extended during the presidency of Barack Obama that generally lowered tax rates and revised the code specifying taxation in the United States...
expiring at the end of 2012.) The committee would have 12 members, 6 from each party. - The agreement specifies an incentive for Congress to act. If Congress fails to produce a deficit reduction bill with at least $1.2 trillion in cuts, then Congress can grant a $1.2 trillion increase in the debt ceiling but this would trigger across-the-board cuts ("sequestration") of spending equally split between security and non-security programs. The across-the-board cuts would apply to mandatory and discretionary spending in the years 2013 to 2021 and be in an amount equal to the difference between $1.2 trillion and the amount of deficit reduction enacted from the joint committee. The sequestration mechanism is the same as the Balanced Budget Act of 1997Balanced Budget Act of 1997The Balanced Budget Act of 1997, , was signed into law on August 5, 1997. It was an omnibus legislative package enacted using the budget reconciliation process and designed to balance the federal budget by 2002....
. There are exemptions—across the board cuts would apply to Medicare providers, but not to Social Security, Medicaid, Medicare beneficiaries, civil and military employee pay, or veterans. Security programs include the U.S. Department of Defense, U.S. Department of Homeland Security, U.S. Department of Veterans Affairs, the National Nuclear Security AdministrationNational Nuclear Security AdministrationThe United States National Nuclear Security Administration is part of the United States Department of Energy. It works to improve national security through the military application of nuclear energy...
, some management functions of the intelligence community, and international affairs from the U.S. State Department.
Balanced Budget Amendment:
- Congress must vote on a Balanced Budget AmendmentBalanced Budget AmendmentA balanced-budget amendment is a constitutional rule requiring that the state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government....
between October 1, 2011, and the end of 2011, but is not required to pass it and send it to the states in order for the debt limit increases to occur (as was the case in the previous Cut, Cap and Balance ActCut, Cap and Balance ActThe proposed Cut, Cap and Balance Act of 2011 was a bill put forward in the 112th United States Congress by Republicans during the 2011 U.S. debt ceiling crisis...
, which was not enacted).
Other provisions:
- Pell grantPell GrantA Pell Grant is money the federal government provides for students who need it to pay for college. Federal Pell Grants are limited to students with financial need, who have not earned their first bachelor's degree or who are not enrolled in certain post-baccalaureate programs, through participating...
funding is increased, but other financial aid is cut. Graduate and professional students will no longer be eligible for interest subsidized loans. Repayment incentives will also be done away with after July 1, 2012.
Legislative history
The bill was the final chance in a series of proposals to resolve the 2011 United States debt ceiling crisis, which featured bitter divisions between the parties and also pronounced splits within them. Earlier ideas included the Obama-Boehner $4 trillion "Grand Bargain", the House Republican Cut, Cap and Balance ActCut, Cap and Balance Act
The proposed Cut, Cap and Balance Act of 2011 was a bill put forward in the 112th United States Congress by Republicans during the 2011 U.S. debt ceiling crisis...
, and the McConnell-Reid "Plan B" fallback. All eventually failed to gain enough general political or specific Congressional support to move into law, as the midnight August 2, 2011, deadline for an unprecedented U.S. sovereign default drew nearer and nearer.
On the evening of July 31, 2011, Obama announced that the leaders of both parties in both chambers had reached an agreement that would reduce the deficit and avoid default. The same day, Speaker of the House John Boehner
John Boehner
John Andrew Boehner is the 61st and current Speaker of the United States House of Representatives. A member of the Republican Party, he is the U.S. Representative from , serving since 1991...
's office outlined the agreement for House Republicans. One key element in the deal being reached and the logjam being broken earlier that afternoon was U.S. Vice President Joe Biden
Joe Biden
Joseph Robinette "Joe" Biden, Jr. is the 47th and current Vice President of the United States, serving under President Barack Obama...
's ability to negotiate with his 25-year Senate colleague, Senate Minority Leader Mitch McConnell
Mitch McConnell
Addison Mitchell "Mitch" McConnell, Jr. is the senior United States Senator from Kentucky and the Republican Minority Leader.- Early life, education, and military service :...
. Biden had spent the most time bargaining with Congress on the debt question of anyone in the administration, and McConnell had viewed him as the one most trustworthy.
| Vote by Party | Yea | Nay | NV | Total |
|---|---|---|---|---|
| Democrats | 95 | 95 | 3 | 193 |
| Republicans | 174 | 66 | 0 | 240 |
| Total | 269 | 161 | 3 | 433 |
House vote
The agreement, entitled the Budget Control Act, passed the House on August 1, 2011 by a vote of 269–161; 174 Republicans and 95 Democrats voted for it, while 66 Republicans and 95 Democrats voted against it. One moment of extra drama came when Arizona Congresswoman Gabrielle GiffordsGabrielle Giffords
Gabrielle Dee "Gabby" Giffords is an American politician. A Democratic member of the United States House of Representatives, she has represented since 2007. She is the third woman in Arizona's history to be elected to the U.S. Congress...
made her first appearance back on the floor of Congress following the near-fatal assassination attempt upon her in the 2011 Tucson shooting
2011 Tucson shooting
On January 8, 2011, a mass shooting occurred near Tucson, Arizona. Nineteen people were shot, six of them fatally, with one other person injured at the scene during an open meeting that U.S. Representative Gabrielle Giffords was holding with members of her constituency in a Casas Adobes Safeway...
; she voted in favor of the bill. Giffords received prolonged, loud applause from her colleagues and said in a statement, "I had to be here for this vote."
| Vote by Party | Yea | Nay | NV | Total |
|---|---|---|---|---|
| Democrats | 45 | 6 | 0 | 51 |
| Republicans | 28 | 19 | 0 | 47 |
| Independents | 1 | 1 | 0 | 2 |
| Total | 74 | 26 | 0 | 100 |
Senate vote
The Senate passed the agreement on August 2, 2011 by a vote of 74–26; seven Democrats and 19 Republicans voted against it. Obama signed the bill shortly after it was passed by the Senate. In doing so, the president said, "Is this the deal I would have preferred? No. But this compromise does make a serious down payment on the deficit reduction we need, and gives each party a strong incentive to get a balanced plan done before the end of the year."Contingent votes
The vote of disapproval on the $500 billion request failed in the Senate by a vote of 45–52. So regardless of a House vote of disapproval the $500 billion increase in the debt ceiling will occur when the 50 days after the request to increase the ceiling expires.On November 18, 2011, the Balanced Budget Amendment
Balanced Budget Amendment
A balanced-budget amendment is a constitutional rule requiring that the state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government....
failed to advance in the House: 261–165
, 23 votes short of the needed 2/3 majority.
Projected and known impacts
The act will not actually reduce the overall U.S. debt over the 10-year period it is specified for, only slow down the existing rate of growth of the debt. That is partly because the cuts due to the act will not reduce federal spending in absolute terms, but rather reduce the year-to-year increases in spending from what had previously been anticipated. Even with the slowdown, both federal spending and the debt are still projected to grow faster than the U.S. economy, due to the cost curveCost curve
In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms use these curves to find the optimal point of production , and profit maximizing firms can use them to decide output quantities to...
effects of health care, which the act does not address.
The debate on the bill was driven by the Republicans' insistence on spending cuts as their condition for agreeing to raise the debt ceiling. This raised concern because of the relationship between aggregate demand
Aggregate demand
In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...
and unemployment; as Patrick Lunsford, Senior Editor of insideARM.com stated in a Forbes
Forbes
Forbes is an American publishing and media company. Its flagship publication, the Forbes magazine, is published biweekly. Its primary competitors in the national business magazine category are Fortune, which is also published biweekly, and Business Week...
magazine blog, "when government spending is slashed, jobs are lost and consumer demand falls." During the debate over the bill, economists across ideologies agreed that reducing spending during a recession would likely make unemployment worse. In analyzing the specific bill that emerged, the nonpartisan Economic Policy Institute
Economic Policy Institute
The Economic Policy Institute is a 501 non-profit, liberal, nonpartisan think tank that seeks to broaden the public debate about strategies to achieve a prosperous and fair economy...
stated, "The spending cuts in 2012 and the failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer jobs in 2012, relative to current budget policy."
Most of the $900 billion in the first tranche of cuts occur in future years and so will not remove significant aggregate demand from the economy in the current and following year. Only $25 billion in federal discretionary spending is required to be removed for 2012. Regarding the across the board cuts, these could not take place until 2013 and so if triggered, a new Congress could vote to eliminate or deepen all or part of them. Some top Republicans were particularly concerned that any defense cuts could not go into effect until after 2013.
Passage of the Budget Control Act of 2011 was not enough to avert, three days later, Standard & Poor's downgrading the nation's credit rating for the first time in the firm's history, from "AAA" (highest) to "AA+" (highest, with qualifications). They said they were "pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics anytime soon." (The United States Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
pointed out an error of $2 trillion in Standard & Poor's calculation of the ten-year deficit reduction under the Act, and commented, "The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.")
S&P has partially disputed this claim of error, arguing that it is not as substantial as the Department of the Treasury is asserting, stating, "In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP)." They further state that they used a spending inflation rate of only 5 percent in their calculations which is actually lower than the 7 percent spending inflation rate the Budget Control Act of 2011 assumes.
See also
- United States public debtUnited States public debtThe United States public debt is the money borrowed by the federal government of the United States at any one time through the issue of securities by the Treasury and other federal government agencies...
- Gramm–Rudman–Hollings Balanced Budget Act
- Budget Enforcement Act of 1990Budget Enforcement Act of 1990The Budget Enforcement Act of 1990 was enacted by the United States Congress as title XIII of the Omnibus Budget Reconciliation Act of 1990 to enforce the deficit reduction accomplished by that law and revise the budget control process of the Federal Government...
External links
- Bill as seen by Congress, via GPO.gov
- Bill at crocodoc site, via FoxBusiness.com