The Budget Control Act of 2011 – What Cuts?

In July 2011 a story that ran in a number of places headlined “Obama’s not Bluffing, Social Security and Military Checks are in danger”.  First the story implies that Medicaid, Medicare, social security and other programs will have no money to pay for all of the outlays. This story also tells us that taxes are too low. They said “Federal and state taxes combined are at their lowest as a percentage of the GDP since the 1950s.” We are told, in essence to stop whining about taxes. “America is trying to run a 21st Century economy on tax rates from the late 50s while whining we pay too much.”

President Obama said in an interview with CBS Evening News anchor Scott Pelley, “I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it.” Adding “This is not just a matter of Social Security checks. These are veterans’ checks, these are folks on disability and their checks. There are about 70 million checks that go out.”

Rueters reported on July 15 2011 that “Ratings agency Standard & Poor’s has warned there is a one-in-two chance it could cut the United States’ prized triple-A rating if a deal on raising the government’s debt ceiling is not agreed soon.”  Adding in the story “The S&P warning comes just a day after Moody's Investors Service warned the U.S. may lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country's legal borrowing limit of $14.3 trillion and the government misses debt payments.” This has happened anyway. Actually S&P warned that if a small deal was reached that would also lead to a downgrade.

Did we get a small agreement?

The S&P Report on the credit downgrade seems to think so. The report states “Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. Under our revised base case fiscal scenario--which we consider to be consistent with a 'AA+' long-term rating and a negative outlook--we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act's revised policy settings.”

H.R.2693 or the Budget Control Act of 2011 actually increases spending. The cuts are not declines in current spending; they are cuts in the increases of future spending. As Ron Paul put it “This is akin to a family ‘saving’ $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda.”

According to John Boehner’s website, “The final agreement is the same as the House-passed bill by including spending cuts that would exceed the amount of the increased debt authority granted to the President.  The bill would cut and cap discretionary spending immediately, saving $917 billion over 10 years – as certified by the nonpartisan Congressional Budget Office CBO) – and raise the debt ceiling by less – $900 billion – to approximately February.  Congress must vote to cut spending FIRST.  Then, the President may ask for debt authority of up to $900 billion, which will be subject to a vote of disapproval by the House and Senate that can be vetoed by the President.”

According to the Whitehouse Office of Management and Budget (OMB) report, spending is projected to increase.

Fiscal Year	Receipts	Outlays	Surplus or Deficit (−)
2011 estimate	2,173.7	3,818.8	-1,645.1
2012 estimate	2,627.4	3,728.7	-1,101.2
2013 estimate	3,003.3	3,770.9	-767.5
2014 estimate	3,332.6	3,977.1	-644.6
2015 estimate	3,583.0	4,189.8	-606.7
2016 estimate	3,819.1	4,467.8	-648.7

In Billions of Dollars

The table above shows projected income, expenses and deficits for the next 6 years.  Clearly spending cuts are not in the budget. The increase in receipts is primarily based on the “Bush Tax Cuts” ending.  AS we can see, the spending is projected to decrease slightly, from $3.8 trillion in FY 2011 to $3.72 in FY 2012 then grow again for the next three years. According to these estimates, a total of $5.4 trillion in deficits will be incurred during this period.  Even if the new super-committee were to get cuts of $1.5 trillion over the next ten years, the first six of that will still have around $4 trillion in deficit spending. Again, how is this spending cuts?

The answer is that in FY 2011 the spending is projected to be 75% more than income. In six years, FY 2016 the spending is “only” projected to be 17% more than income. Spending will not be cut in a real manner, only the amount of “borrowed” money will decrease. Of course, the deficit spending will allow the total debt to grow, but this is about deficits, right?

Another OMB Projects the debt over this same period to grow as well.

Fiscal Year	Gross Federal Debt	Less: Held by Federal Government Accounts	Total
2011 estimate	15,476,243	4,619,793	10,856,450
2012 estimate	16,654,260	4,773,123	11,881,136
2013 estimate	17,750,484	4,966,516	12,783,968
2014 estimate	18,761,182	5,199,011	13,562,171
2015 estimate	19,775,536	5,474,455	14,301,081
2016 estimate	20,824,996	5,761,088	15,063,908

In Millions of Dollars

The gross debt is projected to grow to $20 trillion by FY 2016. The debt will grow from 102% of GDP in FY 2011 to 105% in FY 2016. Even using the governments own figures the Budget Control Act falls short of controlling the spending in the budget.

Granted, actually cutting the spending is not as easy as you or I would have it. First, the “detailed” budget has thousands of line items and each or those have many more sub-categories.  Coming soon we will have a breakdown of where this money is being spent.