August 1, 2011 – Debt Limit Update: Emerging Details and Analysis
President Obama announced last night that a deal had been reached to raise the debt ceiling in exchange for spending reductions. Details are still emerging, but these are the essentials as they stand now.
The package includes approximately $2.4 trillion in cuts, which is smaller than the $4 trillion the President was initially seeking, and will provide an extension of the debt ceiling through 2013, something the Republicans had opposed. The deal will raise the debt ceiling in a two-step process, providing an immediate $900 billion increase while also cutting $917 billion over the next ten years. The majority of reductions will be felt in the outlying years as only $10 billion total in reductions will likely come from this year and next. These funding levels are higher than those passed by the House in the Ryan Budget plan, however Congress will still have to make some difficult decisions on which programs to invest in. Of note, Pell Grants were given $17 billion in the debt limit package, which helps to sidestep a near term budget shortfall and ease the job for appropriators writing the FY12 budget.
In the second step, a bipartisan, joint Congressional committee would identify $1.5 trillion in deficit reduction measures and make its recommendations by November 23, with Congress acting by December 23. Everything is on the table for this so-called Super Committee, including entitlement reform and revenue raisers.
If the Super Committee cannot agree on a package of cuts that can pass both the House and Senate by December 23, 2011 the remaining $1.5 trillion in reductions will come from another across the board cut to spending from 2013-2022. However, there is a new wrinkle designed to pressure both Republicans and Democrats to make concessions in order to avoid the across the board cut: if the Super Committee does not come to a consensus, 50% of the across the board cuts will come from the Department of Defense and Medicare provider payments will also be reduced. To provide some context, this year Medicare is scheduled to reimburse providers $409 billion. To achieve the savings required for the debt limit increase these payments will face significant cuts on a year-over-year basis. By establishing the commission to cut priorities of both parties, there will be increased pressure to produce a package that can pass each chamber by December 23, 2011. This pressure sets up a process similar to the Independent Payment Advisory Board created in the ACA, but puts it on steroids and applies it to aspects of federal spending well beyond health care. This scenario will require all interests in Washington to be actively engaged as the Super Committee process plays out between now and the end of this year.
Outlook
Overall, the early impact of the budget cuts in the agreement is not as draconian as some had proposed, but the battles will intensify as the Super Committee is created and develops its recommendations to Congress.
House and Senate Democrats and Republicans will be meeting throughout the day to caucus, learn more about the debt limit package, and sound out where support for the package needs to be firmed up. Vice President Biden will join in some of these meetings to make the case for the debt limit agreement on behalf of the White House. These votes could come as early as today, although the timetable remains in flux.
WSW is tracking developments on the debt limit negotiations in real-time and will continue to advise clients on actions and the implications of the agreement for client priorities as events unfold.
