• CBO on Budget Control Act

    The CBO today released an analysis of the estimated impact of the automatic enforcement procedures of the Budget Control Act of 2011 that will occur if Congress does not enact sufficient deficit reduction as specified by the Act before January 15, 2012. Several highlights:

    • The Super Committee is to propose deficit reduction of at least $1.5 Trillion by December 23, 2011
    • If legislation resulting in at least $1.2 Trillion in deficit reduction is not passed by January 15, 2012, then automatic cuts are to take place
    • The magnitude of the automatic cuts depend upon what has passed by Jan 15, 2012 (if nothing passes, automatic cuts equal $1.2 Trillion; if deficit reduction equal to $1 Trillion passes, then automatic cuts equal $200 Billion, for example.)
    • If automatic cuts are triggered, they occur equally (in dollar terms) in defense and non defense spending beginning in FY 2013
    • Total savings include reduced debt service resulting from budget cuts
    • ASSUMING no deficit reduction is passed by January 15, 2012, the following is true
    • The act requires that 18% of the total deficit reduction come from reduced debt service costs ($216 Billion; then $984 Billion would come from programmatic budget cuts from 2013-2021, split into 9 annual amounts of $109 Billion per year).
    • The $109 Billion annual cuts would come from Defense spending ($54.5 Billion) and all other budget functions ($54.5 Billion)
    • Defense spending is defined as being from budget account 050, most of which is Department of Defense, but which includes other spending as well
    • There are a variety of detailed budgetary rules that would allocate these cuts to specific programs
    • Most notably, Social Security and Medicaid would be exempt from automatic budget cuts
    • From 2013-2021 CBO estimates that there is approximately $24 Trillion in planned mandatory spending, and that around 70% of this is exempt from automatic cuts specified in the Act

    A few health policy highlights that I did not understand until I read this report

    • The majority of the mandatory spending that is available for automatic cuts is Medicare, but the Budget Control Act specifies that most Medicare spending for individual benefits cannot be cut by more than 2% annually (individual services payments under parts A and B, Medicare Advantage, and Part D); once this 2% cap is reached, then needed savings are obtained from all other non defense discretionary and mandatory programs to achieve the required deficit reduction (see Footnote 10, p. 6)
    • Reductions in parts of Medicare will be partially offset by increases in other parts of the program, reducing the net deficit reduction that would be achieved by the full automatic cuts taking place. For example, Part B premiums are set to cover a percentage of Part B program costs, which if reduced by automatic cuts will result in a lower Part B premiums. The net effect of such offsets is estimated to be $31 Billion over 2013-2021.

    Total deficit reduction projected by CBO if no legislation is passed is $1.1 Trillion, slightly less than the $1.2 Trillion noted in the legislation due to Medicare provisions noted immediately above, some savings occurring after 2021, and CBO estimating less savings in interest costs.

     

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