For now, the verdict on the budget deal struck by the Obama administration and congressional leaders over the weekend appears to be: bad, but it could have been worse.
The deal protects entitlements like Social Security, Medicaid, and food stamps for now, but it will likely produce some cuts in some non-entitlement programs while freezing spending for most of the others at current levels. If approved, it would avert a possible default on the national debt and push the issue into 2013, after the 2012 elections.
The deal is divided into two parts, the first of which relies on new spending caps that would save $917 billion over 10 years (from 2012-2021), $350 billion of which would come from defense spending. In fiscal 2012, the deal includes $1.043 trillion in discretionary spending (excluding entitlements), about $7 billion less than 2011, but $44 billion below what it would be if 2011 spending were adjusted for inflation. After that, non-entitlement spending would grow slightly every year, enough to offset inflation, reaching $1.234 trillion in 2021.
Congress would need to decide how to allocate this overall spending among specific programs. Some limited cuts could be imposed on some non-entitlement spending programs, including some block grants, for example. Spending for most other non-entitlement programs is likely to be held constant, with no adjustment for inflation in 2012. Entitlements like Medicaid, Medicare and Social Security would not be affected.
The second part of the deal is more complicated. First, it would create a 12-member bipartisan commission to develop a legislative proposal to cut spending by an additional $1.5 trillion from 2013 through 2021. The commission’s proposal would be submitted to Congress by November 23 and be voted on in both the House and Senate by December 23.
The deal also requires a vote on a balanced budget amendment between October 1 and December 31, although the contents of that balanced budget amendment are not specified. If either the spending cuts or balanced budget amendment is enacted, the debt ceiling would be increased by another $1.5 trillion, enough to support current obligations through early 2013.
To put pressure on Congress to reach a deal, the proposal includes a trigger mechanism that would force across-the-board spending cuts if the bipartisan commission does not adopt, and Congress does not subsequently approve, spending cuts worth at least $1.2 trillion from 2013-2021. The across-the-board cuts would affect both entitlements and discretionary spending, split evenly between domestic programs and defense spending. Social Security, Medicaid, unemployment insurance, and low-income programs would be exempt. Medicare would be included in the cuts, but the cuts would be focused on providers, not recipients. Under the trigger, the debt ceiling would be increased by another $1.2 trillion, still enough to push the issue into 2013.
While tax increases are not explicitly part of the deal, they remain a strong factor. If nothing is done, Bush-era tax cuts are slated to expire in early 2013. For this reason, taxes are likely to be on the table at some point. Altogether, a combination of pending tax increases when the Bush-era tax cuts expire, another debt ceiling crisis when the new debt ceiling is reached, and trigger-based domestic and defense cuts may be enough to bring the two parties together for a deal in 2012, probably after the election.