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Details of the Debt Deal

After weeks of political wrangling, Congress and President Obama enacted the Budget Control Act of 2011.  The legislation provides for an immediate increase the debt ceiling of $400 billion, averting a potential default by the U.S. government.  Avoiding default is probably the one thing most Americans are pleased with in this bill.

The debt deal is long on political rhetoric and short on details.  While many of our political leaders are touting the success of this legislation as a significant step towards dealing with the fiscal challenges of our country, there is little discussion of what is actually going to happen.  Beyond deferring the most significant spending cuts to a Joint Select Committee (JSC) composed of 12 Congressional leaders, evenly divided by house and party, there are few details of how the actual spending cuts are going to be achieved.

The Congressional Budget Office scored the spending cuts to be $2.1 trillion between 2012 through 2021. Of this amount $917 billion is supposed to be guaranteed in exchange for allowing the Treasury to sell another $900 billion in bonds.  The remaining $1.2 trillion is supposed to be determined by the JSC.  At this point, no one knows what is going to be cut to achieve any savings.

From what has been released, the bill calls for $21 billion of spending cuts in Fiscal 2012 and $42 in 2013.  Not surprisingly, the substantial cuts happen far in the future, which means there is always the chance the cuts won’t happen.  For those of us who believe government spending is on an unsustainable path, this is not very encouraging.  Here are a couple of things to consider.

President Obama’s 2012 Budget  proposal calls for $2.6 trillion in revenue and $3.7 trillion of spending; resulting in a $1.1 trillion deficit.  The House passed a budget with $2.5 trillion in revenue and $3.5 trillion of spending; racking up a $1 trillion deficit.  According to the debt deal, spending will be trimmed by a measly $22 billion.  This is about 0.6% of all federal  spending for the coming year.

Talking in trillions and billions can seem rather esoteric, so think in these terms.  Assume you make $50,000 this year.  If you managed your finances like the federal government, you would spend over $70,000, borrowing the difference.  If you cut your spending like Congress and the President have proposed, you would only trim your spending by $420 for the next year.  That’s right… just a mere $8 per week, even though you’re overspending by $20,000.  Given those parameters, would you say you were serious about changing your spending habits by cutting $8 per week?

Many politicians and commentators are calling this a historic piece of legislation.  They refer to it as a down payment on our debt and an important first step.  This may be true, but it’s an indication of how difficult it is for Congress to cut federal spending.   If they can barely manage to trim $22 billion, how are they going to come anywhere near close to $1 trillion?  It would take over $1 trillion of additional cuts and/or revenues to balance the budget, before we can even begin to pay down the debt.

The debt deal further illustrates the Congressional propensity to defer hard decisions.  Effectively, it will be a future Congress and potentially a different President, who will have to make the hard decisions to cut spending and balance the budget.  Given the history and culture of Congress, it’s no wonder the debt deal is long on politics and promises and short on specifics and spending cuts.

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