July 27, 2011
House Speaker John Boehner and Senate Majority Leader Harry Reid recently put forward plans to reduce deficits over the next decade as part of proposals to raise the limit on the national debt. CBO has estimated the budgetary effects of those plans—both titled the Budget Control Act of 2011. CBO’s estimate for the legislation proposed in the House can be found here; our estimate for the legislation proposed in the Senate can be found here.
What Would the Proposals Do?
The plans proposed by Speaker Boehner and Majority Leader Reid would both seek to cut spending primarily by capping discretionary appropriations; smaller reductions or additional costs would come from certain “program integrity” initiatives—efforts to reduce overpayments of benefits or to increase compliance with tax laws—and changes to other programs such as student loans. In conjunction with those changes, Speaker Boehner’s proposal would establish procedures for increasing the debt limit by up to $2.5 trillion in a series of steps, while Majority Leader Reid’s proposal would raise the debt limit by $2.7 trillion in one step. The Speaker’s plan would also establish procedures for Congressional consideration of a balanced budget amendment to the Constitution.
The plans differ as to the details of procedures that would be used for enforcing the caps on discretionary spending and as to the goals of a Congressional Joint Select Committee on Deficit Reduction, which would be established by both pieces of legislation. Under Speaker Boehner’s proposal, the committee would be charged with a goal of reducing the deficit by $1.8 trillion between 2012 and 2021. Under Majority Leader Reid’s proposal, the committee would be charged with a goal of reducing the deficit to 3 percent of gross domestic product or less. CBO’s analysis focuses on only the budgetary effects from enacting and implementing these bills, excluding the potential additional budget savings that might occur from future legislation based on recommendations of the proposed committee.
Overall Budgetary Effects
Below is a table comparing CBO’s estimates of the budgetary effects of the two plans. These estimates are measured relative to CBO’s March 2011 baseline projections adjusted for subsequent appropriation action. (In CBO’s baseline, appropriations for discretionary programs are assumed to grow each year with inflation from the amounts provided for the most recent year. CBO adjusted its March baseline projections to incorporate reductions in projected spending resulting from enactment of full-year appropriations for the current fiscal year [P.L. 112-10], which occurred after that baseline had been prepared.)
Speaker Boehner’s Plan: CBO estimates that the legislation would reduce budget deficits by about $850 billion between 2012 and 2021. The caps on discretionary appropriations would reduce such spending by $710 billion, other parts of the legislation would lower spending by about $5 billion, and the savings in interest on the public debt because of the lower deficits would come to about $135 billion. (CBO’s cost estimates for legislation do not ordinarily include effects on debt service costs, but CBO provides such estimates, when requested, for broad budget plans.)
As requested by the Speaker’s staff, CBO also calculated the net budgetary impact of that plan if the discretionary savings are measured relative to CBO’s January baseline projections, which were the basis for some of the budget negotiations and which reflected discretionary funding levels that were largely a temporary extension of the 2010 appropriations (because the full-year 2011 appropriations had not yet been enacted). Relative to that baseline, CBO estimates that the legislation would reduce budget deficits by about $1.1 trillion between 2012 and 2021. Savings from the discretionary caps would amount to about $890 billion, other parts of the plan would reduce spending by about $5 billion, and the savings in interest on the public debt because of the lower deficits would come to about $175 billion.
Majority Leader Reid’s Plan: CBO estimates that the legislation would reduce budget deficits by about $2.2 trillion between 2012 and 2021 relative to CBO’s March 2011 baseline adjusted for subsequent appropriation action. The caps on discretionary appropriations would reduce such spending by nearly $1.8 trillion, other parts of the legislation would lower spending by about $5 billion, and the savings in interest on the public debt because of the lower deficits would come to $375 billion.
For each version of the legislation, nearly all of the estimated savings would result from imposing caps on discretionary appropriations and the resulting effect on debt service payments. The plans differ on whether funding related to the wars in Afghanistan and Iraq and similar activities (sometimes referred to as overseas contingency operations or OCO) would be subject to a cap.
Speaker Boehner’s Plan: The caps on appropriations of new budget authority start at $1,043 billion in 2012 and reach $1,234 billion in 2021. Those caps would not apply to spending for OCO, and no separate caps on OCO would be established by the legislation. The legislation also would impose caps of $1,262 billion for 2012 and $1,196 billion for 2013 on outlays from discretionary appropriations.
Relative to the adjusted March baseline, proposed budget authority would be $840 billion lower and outlays $710 billion lower over the 2012-2021 period. The projected reductions in outlays are smaller than the projected reductions in budget authority because outlays generally lag behind budget authority (and thus some of the savings from the caps would occur beyond the 10-year budget window) and because some budget authority never results in outlays.
Majority Leader Reid’s Plan: Most of the estimated savings would result from imposing caps on discretionary appropriations—both for OCO funding and for all other discretionary funding. The caps on appropriations of new budget authority excluding OCO funding start at $1,045 billion in 2012 and reach $1,228 billion in 2021. The legislation also would impose caps of $127 billion for 2012 and $450 billion over the 2013-2021 period on funding for operations in Afghanistan and Iraq and for similar activities. For this estimate, CBO assumes that the $450 billion would not necessarily be limited to operations in Afghanistan and Iraq and would be evenly distributed between 2013 and 2021 in the amount of $50 billion each year. That funding path is illustrative since the use of $450 billion over the nine-year period could vary significantly from that average.
Relative to the adjusted March baseline, proposed budget authority—excluding funding for OCO—would be nearly $840 billion lower and outlays about $750 billion lower over the 2012-2021 period. The separate caps on appropriations for the wars in Afghanistan and Iraq and for similar activities would reduce budget authority by $1.2 trillion and outlays by $1.0 trillion relative to the adjusted March baseline.
Program Integrity Initiatives
Both plans include program integrity initiatives—that is, certain amounts of funding in excess of the discretionary caps would be allowed for specified agencies to undertake efforts to reduce overpayments of benefits or underpayments of taxes.
Speaker Boehner’s Plan: The legislation includes program integrity initiatives aimed at reducing overpayments for Social Security’s Disability Insurance (DI) and Supplemental Security Income (SSI) programs and for health care programs (including Medicare, Medicaid, and the Children’s Health Insurance Program or CHIP). CBO estimates that the net savings associated with those programs, after accounting for the added spending to undertake the initiatives, would amount to about $1 billion over the 2012-2021 period. Additional savings would accrue after 2021. The projected net savings are small because much of the funding in excess of the caps would be necessary just to cover the program integrity spending already projected in CBO’s baseline.
Majority Leader Reid’s Plan: The plan proposed in the Senate includes program integrity initiatives aimed at identifying and reducing overpayments of federal benefits (for DI, SSI, unemployment insurance, Medicare, Medicaid, and CHIP) and increasing compliance with tax laws. CBO estimates that, under the bill, enacting and implementing these programs would increase spending by $18 billion over the 2012-2021 period. That outcome is the result of two factors: (1) As was the case with the Speaker’s plan, much of the funding in excess of the caps for the Social Security Administration and the health care initiatives would be necessary just to cover the program integrity spending already projected in CBO’s baseline; and (2) the provisions related to unemployment compensation and tax compliance are not specified in a way that would assure budgetary savings.
Other Changes in Direct Spending
Savings from direct spending provisions (that is, provisions affecting spending that is not controlled by annual appropriation acts) would be small under both versions of the legislation.
Speaker Boehner’s Plan: The legislation would amend the Higher Education Act of 1965 to appropriate additional funds for the federal Pell Grant program and make two changes to the Federal Student Loan Program. CBO estimates that, on net, those changes would reduce direct spending by about $5 billion over the 2012-2021 period.
Majority Leader Reid’s Plan: Provisions affecting direct spending programs would reduce net direct spending (including increases in offsetting receipts) by $24 billion over the next 10 years. CBO estimates that savings would result from: changes in laws concerning auctions of licenses to use the electromagnetic spectrum and the spending of auction proceeds; and (2) reductions in payments to agricultural producers. Under this legislation, changes to Pell grants and student loan programs would slightly reduce direct spending.
Reduced Debt Service Costs
For both plans, CBO estimated the savings in interest costs that the government would realize because the lower deficits would reduce the amount of borrowing the government would have to do. Those savings came to about $135 billion for Speaker Boehner’s plan and $375 billion for Majority Leader Reid’s plan.