Update: President Obama has signed the deal into law.
Washington took the debt limit to the edge as the Senate voted today, 74-26, to enact the agreement reached late Sunday to increase the statutory debt ceiling while also reducing the federal budget deficit. The House approved the measure Monday on a 269-161 vote. President Obama will sign the legislation later today, the day the Treasury Department said the current debt limit will be reached.
The deal will increase the debt limit by up to $2.4 trillion in three increments through 2012. It will also reduce the deficit by a similar amount over the next decade through discretionary spending caps and a joint committee tasked with finding at least $1.2 trillion in deficit reduction that Congress must vote on in a fast-track process. A trigger of automatic spending cuts will kick in if deficit reduction does not materialize from the joint committee. Read the summary here.
Throughout the process CRFB called for an agreement that coupled a debt limit increase with substantial deficit reduction and recently reiterated the recommendation. Unfortunately, this deficit reduction package does not go far enough to improve the fiscal outlook for the U.S.
Attention will now turn to the joint committee, which must report by the end of the year. We hope the committee will go beyond expectations and produce a comprehensive plan that will stabilize the national debt in the medium term and put us on the path to lower it further in the longer term. The committee will have solid examples to follow in the form of plans from the Gang of Six, the White House Fiscal Commission and many others (compare all the plans here).
This is not the end, only the latest step. The fiscal challenge facing the country is illustrated in a recent CRFB PowerPoint presentation. Try your own hand at meeting the challenge with our Stabilize the Debt online budget simulator.
In today's Washington Post, several contributors offered their thoughts on the recent debt deal reached by leaders in Washington to raise the debt ceiling. Among the contributors were CRFB board members Erskine Bowles and Alan Simpson and CRFB president Maya MacGuineas.
Erskine Bowles and Alan Simpson wrote that while they are glad the federal government will avoid default, this deal is not enough to restore our fiscal health and should be regarded as nothing more than a first step. They also shared some of the lessons they learned as co-chairs of the President's bipartisan fiscal commission, saying:
If there is one lesson from our commission’s work that should stand as the best guide for the work of the new committee, it is this: The more we put on the table, and the bigger, more far-reaching and more comprehensive we made our plan, the more support we received from our members. The only way politicians can make painful choices is if they know the other side is making painful choices as well and if they know they are solving the whole problem at once, so they don’t have to come back and do it all again.
There is a reason we named our final report “The Moment of Truth.” It’s time to go big or go home.
Maya MacGuineas also expressed relief that the government will avoid default, but added that there isn't much else to be happy about. An opportunity to enact comprehensive fiscal reform along the lines of Bowles-Simpson or the Gang of Six was missed, she wrote, and the deal we ended up with isn't nearly strong enough.
She concluded on a hopeful note, however, saying:
But all hope is not lost. Let’s hope the members of the super-committee are lawmakers who have sincere interest in addressing our fiscal challenges and a willingness to work across the aisle. Markets and outside institutions such as the Fed, the International Monetary Fund and the credit rating agencies are likely to maintain the pressure to do something real. It is conceivable that this committee could go for the brass ring, exceeding its mandate and expectations. If it does, we still have a chance to fix our fiscal problems with a package that can preserve the key priorities of both parties: pro-growth tax policies and protection of public investments and those who depend on government programs. If the committee doesn’t, this task will only get harder over time.
Click here to read the full list of commentaries.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
We have a deal (pending votes, of course). (UPDATE: CRFB has a press release on this deal here)
Last night, the leaders from both parties announced a deal to raise our debt limit and avoid economic calamity, combined with some significant deficit reduction. The deal is modeled after plans released by Senate Majority Leader Harry Reid and Speaker of the House John Boehner last week. The deal includes upfront savings that match those in the Boehner plan, along with a three-tranche increase in the debt limit and a process for a new Joint Congressional Committee to find more savings, backed up by a trigger of automatic spending cuts if savings are not realized. In total, the plan lays out a process by which the debt limit will be raised between $2.1 and $2.4 trillion and the deficit will be reduced by at least $2.1 trillion.
*We assumed that other mandatory and discretionary spending change at the same level as the Fiscal Commission's.
As for upfront savings, the deal calls for the exact same discretionary spending caps as under the Boehner plan, with the exception that in 2012 and 2013, the caps specify levels for Security and Non-Security (under the White House definition of the categories) as opposed to ranges for Defense and Non-Defense. The caps, according to the CBO score, would reduce outlays by $756 billion from 2012-2021. The plan also matches the program integrity efforts and changes to Pell Grants to pay for increased funding by eliminating in-school interest subsidies for student loans. Including interest savings, this puts the plan at $917 billion in savings, ala Boehner's plan.
The deal includes an immediate increase in the debt limit equal to $400 billion, which Treasury estimates will give it enough room to borrow through September. Following that, a $500 billion increase to the debt limit would be subject to a resolution of disapproval from the Congress, which would be subject to a Presidential Veto.
Lastly, the deal calls for a special joint congressional called the Joint Select Committee on Deficit Reduction of six Democrats and six Republicans charged with finding deficit reduction equal to $1.2-1.5 trillion, off of its own baseline, in order to achieve an additional $1.5 trillion debt ceiling increase. The committee is guaranteed a fast-tracked vote on its recommendations before December 23.
If the joint congressional committee either fails to come to an agreement on a plan of at least $1.2 trillion in savings, or if a sufficient plan that it agrees on fails to become law, there will be an across-the-board sequester composed of 50 percent defense spending and 50 percent domestic spending with Social Security and low-income programs exempt and limiting Medicare cuts to 2 percent of the cuts.
The sequestration mechanism, similar to the one contained in the Balanced Budget and Emergency Deficit Control Act (Gramm-Rudman-Hollings), would not go into effect until the start of 2013--which coincides with the expiration of the 2001/2003/2010 tax cuts. The White House as also indicated that they will use the tax cuts as a trigger to ensure that revenue comes out of the special committee.
If the committee does come up with a deal totaling between $1.2 and $1.5 trillion in deficit reduction, the debt ceiling is increased equal to that same amount. If the committee comes up with a deal less than $1.2 trillion, the difference will be made up with sequestrations. The debt ceiling will therefore be increased by a minimum of $2.1 trillion and a maximum of $2.4 trillion, regardless of whether the committee meets its minimum goal of $1.2 trillion or exceeds $1.5 trillion in savings.
A final provision of the deal would guarantee a vote in both Houses on a balanced budget amendment, which would be expected to fail in the Senate.
Although the legislation could serve as a useful first step toward reducing the deficit, it would be insufficient to bring the debt under control. Based on realistic assumptions, debt could still grow to between 76% and 80% of GDP by the end of the decade (see the graph above), even if the commitee is successful in enacting a full $1.5 trillion cuts.
The joint committee should therefore tool to enact a far more ambitious deficit reduction plan - preferably closer to $3 trillion - and must make sure it is addressing long-term entitlement growth and comprehensive tax reform.
Breakthrough? – There were tough negotiations. Deals were made. Big names were moved. It wasn’t just the MLB and NFL that saw frenetic action ahead of deadlines. The approaching August 2 debt limit deadline has had policymakers scurrying to reach an agreement as nervous voters and markets watch. Yet, unlike Donovan McNabb and Albert Haynesworth, the debt ceiling remains a presence in DC as the deadline nears. However, a resolution to the legislative gridlock appears in sight as leaders moved towards each other over the weekend and agreed to a deal late Sunday. Votes are expected today on legislating the agreement.
The Deal – The deal includes raising the debt limit by up to $2.4 trillion in increments, which should last through 2012; 10-year discretionary spending caps split between security and domestic spending that will save about $1 trillion; creating a joint congressional committee to identify an additional $1.5 trillion in deficit reduction to be enacted via a fast-track process by the end of the year; establishing an enforcement mechanism triggering spending cuts evenly split between domestic and defense spending if the joint committee process fails to produce deficit reduction; and requiring both chambers of Congress to vote on a balanced budget amendment to the Constitution by the end of the year. Read the White House fact sheet and see the full text of the legislation implementing the deal.
The Committee – The joint committee formed by the deal, dubbed a “super committee” by some and officially titled the Joint Select Committee on Deficit Reduction, will consist of 12 lawmakers evenly divided by party and chosen by congressional leaders. It will be tasked with recommending deficit reduction of at least $1.5 trillion over the next decade. Entitlement and tax reform could be included in the joint committee’s recommendations. Each committee of Congress can submit recommendations to the joint committee by October 14, 2011. The joint committee is to vote on detailed recommendations by November 23, 2011 and submit a report and legislative language with the recommendations, approved by a majority of its members, by December 2. Congress must then vote up or down on the recommendations by December 23, 2011. The joint committee will become a focal point for deficit hawks looking for a comprehensive fiscal plan and special interests seeking to defend favored spending and tax breaks.
The Votes – Congress is expected today to take up legislation enacting the deal. The House is expected to go first with a floor vote later today. Finding enough votes in the House appears to be the biggest hurdle to enacting the deal.
Plans, Slams and Jams – House Speaker John Boehner (R-OH) and Senate Majority Leader Harry Reid (D-NV) pushed competing plans last week as each side slammed the other’s plan and the Senate accused the House of trying to jam through its preferred approach. However, for all the posturing, the two plans had a great deal in common (see here for a comparison of the numbers and here for a side-by-side of provisions). The trigger mechanism to enforce deficit reduction if a plan did not emerge from the joint committee or was rejected by Congress was one of the final sticking points among negotiators. CRFB offered ideas for triggers that could ensure significant savings such as across-the-board spending reductions. The debt ceiling has to be raised for the sake of the economy, but politicians cannot lose sight of the need to develop a long-term comprehensive fiscal plan, as CRFB reminded them. CRFB all along called for a deal that couples a debt limit increase with substantial deficit reduction. Specifically, we recommended a significant down payment and a credible process to produce further savings. However, the $2.5 trillion deficit reduction goal falls short of the $4-5 trillion CRFB called for. We hope that the joint committee goes above and beyond the minimum $1.5 trillion in deficit savings in order to stabilize the debt at a reasonable level over the medium term while putting the country on a course to further reduce the debt over the longer term.
Beige Book Cites Red Ink – The Federal Reserve last week released its report of current economic conditions based on anecdotal evidence. The report cited uncertainty over the national debt and the U.S. fiscal outlook as one of the factors contributing to slower growth. CRFB’s “Announcement Effect Club” highlights those who contend that developing a credible fiscal plan will help boost the economy not just in the long run, but also in the shorter term.
IMF Wants US Fiscal Reform ASAP – The International Monetary Fund (IMF) issued a report last week stating that it is urgent that the US raise the debt limit while agreeing on a medium-term deficit-reduction plan. The plan should include entitlement reform and revenue increases and must begin in fiscal year 2012. The sentiment was largely backed up by new IMF Managing Director Christine Lagarde, who said the US must raise the debt limit and also develop a credible fiscal plan to reduce the national debt.
Business Titans Weigh in on Tax Reform – At a Senate Finance Committee hearing last week on CEO perspectives on tax reform, the heads of Wal-Mart and Kimberly-Clark both testified that they would accept elimination of some tax breaks in exchange for lower corporate tax rates. That is essentially the Zero Plan for tax reform proposed by the Fiscal Commission, which reduces or eliminates tax expenditures in exchange for lower tax rates (see here for more tax expenditure reform ideas).
Fiscal Rules Examined – A hearing of the Joint Economic Committee last week looked at how fiscal rules could help improve the budget outlook. Budget process tools like spending caps, debt triggers and balanced budget amendments have received a great deal of attention lately as potential ways to put the country on a sustainable fiscal course. The Peterson-Pew Commission on Budget Reform has maintained that budget process reform can play a key role in reducing the deficit, offering a detailed blueprint in Getting Back in the Black -- though process is not a substitute for a comprehensive fiscal plan with specific deficit-reduction policies. The Commission also provided a Fiscal Toolbox summarizing and comparing various fiscal tools, which is a part of its one-stop budget process resource.
Key Upcoming Dates
- Treasury Secretary Geithner says that the U.S. will default on its obligations by August 2 if the statutory debt ceiling is not increased before then.
- Senate Finance Committee hearing on Medicare-Medicaid dual eligibles and lowering health care costs at 10 am.
- Fiscal Year 2012 begins for the federal government.