Long-Term Implications of the Budget Control Act of 2011

This summer, the Congress passed and the president signed the Budget Control Act of 2011 (BCA) that put in place a process for reducing the deficit. The BCA imposed caps on future discretionary spending and empowered a bipartisan, bicameral committee (the “Supercommittee”) to identify additional deficit reduction by Thanksgiving. Over the next 10 years, the spending caps are projected to reduce deficits by approximately $900 billion, and the Supercommittee is charged with finding $1.5 trillion of additional savings. If the Congress and president fail to enact a bill to reduce the deficit by at least $1.2 trillion, the BCA will impose automatic spending cuts (known as sequestration) to achieve $1.2 trillion in deficit reduction including interest savings.

According to new analysis by the Peter G. Peterson Foundation, the BCA (under full sequestration) would make only a small improvement in our nation’s long-term fiscal outlook. Before the BCA was enacted into law, federal debt was projected to soar to 187 percent of gross domestic product (GDP) by 2035, according to the Congressional Budget Office (CBO) current policy baseline. After enactment of the BCA, the foundation projects that federal debt would climb to between 134 to 164 percent of GDP by 2035, depending on how fast discretionary spending grows after the 10-year period covered by the BCA. Further, the foundation projects that federal debt would continue to soar after 2035, reaching the same 187 percent of GDP between 2038 and 2043. In other words, the new law delays the long-run growth of debt by only 3 to 8 years. (See Appendix for a detailed description of the projections.)

Why is the effect of the BCA so small? The main reason is that the BCA fails to enact policy changes that address the fundamental drivers of deficits over the long run. For example, in the event of sequestration, the BCA would do little to control the rising costs of entitlement programs (especially the health programs), and it would not require any increase in revenues.

The United States is facing daunting demographic and budgetary challenges that will get much worse in the years beyond 2021. Baby boomers are retiring and living much longer, while health care costs continue to grow at rapid rates. Unless entitlement spending is controlled, taxes are raised, or both, pressures within the budget will push federal debt to unsustainable levels that threaten to undermine our economy.

The Supercommittee needs to do more than just “Go Big.” To address the real threat to our future economy, it needs to “Go Long,” by addressing the fundamental drivers of our long-term debt.

Appendix

These projections are based on a long-term budget model developed by the foundation. The current policy projection (before the BCA) replicates the CBO June 2011 Alternative Fiscal Scenario.

Our analysis of the effect of the BCA assumes full sequestration and uses CBO’s estimates of the cost savings from 2012 to 2021; after 2021, the analysis assumes that spending (other than discretionary spending subject to caps) grows at the same rate as in CBO's Alternative Fiscal Scenario (although it starts at a lower level due to the savings from the BCA over the 2012-2021 period).

For the discretionary spending subject to caps, the foundation projects two alternative scenarios. One assumes that Congress strictly adheres to the caps on discretionary spending for 10 years, and thereafter grows such spending at the same rate as GDP. Under such scenario, federal debt climbs to 134 percent of GDP in 2035 and to about 187 percent of GDP in 2043.

Adhering strictly to the spending caps will require significant discipline. Congress would need to reduce discretionary spending from 9.3 percent of GDP in 2010 to 5.3 percent[i] of GDP in 2021 and hold it at that level through the end of the projections. At 5.3 percent of GDP, discretionary spending would be substantially below its historical average of 8.7 percent since 1971 and its 7.2 percent average during the Clinton and Bush administrations. Indeed, the lowest value ever recorded for discretionary spending was 6.2 percent of GDP in 1999.

Our alternative assumption is that the spending caps are strictly adhered to for the 10-year period covered under the BCA, but that discretionary spending increases as a percentage of GDP after 2021. Under this scenario, discretionary spending averages 7.2 percent of GDP from 2022 through 2038, and federal debt soars to 164 percent of GDP in 2035 and to about 187 percent of GDP in 2038. These projected levels of debt are similar to those recently released by the Government Accountability Office.

Data Sources

Congressional Budget Office, CBO’s 2011 Long-Term Budget Outlook (June 2011)

Congressional Budget Office, CBO Analysis of the August 1 Budget Control Act (August 1, 2011)

Congressional Budget Office, The Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act (September 12, 2011)

Government Accountability Office, The Federal Government’s Long-Term Fiscal Outlook: Fall 2011 Update (October 24, 2011).

Statement of Douglas W. Elmendorf on Discretionary Spending before the Joint Select Committee on Deficit Reduction (October 26, 2011)

[i] Assuming overseas troops are drawn down to 45,000 by 2015.