Understanding the Debt Ceiling Debate and the Budget Control Act of 2011
This lesson printed from:
Posted March 8, 2012
Author: Chad Mares
Posted: March 8, 2012
Updated: December 3, 2012
This lesson provides an introduction and an overview of the Budget Control Act of 2011. Students will be given information about the legislation and presented with different proposals for dealing with the long-term deficit problem of the United States.
- Explain how the President's Budget proposals estimate future spending and how the Congressional Budget Office uses that data to estimate the impact of proposed changes in the budget.
- Analyze the details of the Budget Control Act of 2011.
- Provide their ideas for the present/future.
Over the summer of 2011, the US Congress and the President were engaged in a heated political debate over the passage of a debt ceiling increase. The Federal debt ceiling is a limit that Congress places on the Treasury Department for the amount of money they are allowed to borrow before they must seek authorization from the Congress to borrow more. The US Constitution gave Congress the power to borrow money. During World War I, Congress ceded part of its authority to the Treasury Department in order to finance the US involvement in the war more efficiently. One of the stipulations of the proposal known as the Second Liberty Bond Act, was that Congress would enact aggregate limits on the amounts the Treasury could borrow. These aggregate limits became the foundation of what is currently known as the Debt Ceiling.
In early January 2011, Treasury Secretary Timothy Geithner issued a statement saying that the US would reach its existing debt limit sometime in March based on projections of revenues and expenditures available at the time. The debt limit was set at $14.3 trillion stemming from the last increase in 2010, up from the previous limit of $12.4 trillion. Geithner warned in his statement that by increasing the debt limit, the Treasury Department "would be prevented by law from borrowing in order to pay obligations the Nation is legally required to pay." Geithner expressed that if Congress did not raise the debt ceiling that the Treasury Department would default, "on legal obligations of the United States, causing catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009."
(Optional: Students are encouraged to read the paper "Debt Limit: History and Recent Increases. ")
Geithner Issue Dire Consequences: Article from ABC news on the January statement released by Treasury Secretary Tim Geithner.
The Debt Limit: History and Recent Increases. Report to Congress from the Congressional Research Service. Paper provides an introduction and details pertaining to debt limit increases over the 20th and early 21st century.
Keith Hennesey on the Debt Ceiling and the Budget Process. Keith Hennesey of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the debt ceiling and the budget process. Hennessey, who worked for Senate Majority Leader Trent Lott on budget issues in the late 1990s, explains the politics of the debt ceiling and the budget process.
Keithhennesey.com. Mr. Hennesey's blog that he uses to discuss American economic policy. The site provides a summary and analysis of the Budget Control Act.
CBO Analysis of the Budget Control Act of 2011 and its estimated impact on the deficit.
The Economist: Why the Super Committee Failed. Article examines the implications for addressing the budget deficit in light of the Super Committee's failure to make any further spending cuts beyond those imposed by the sequester.
Thirty Years of Debt Ceiling Increases: Veronique de Rugy uses data from the President’s Budget to illustrate the past 30 years of raising the debt ceiling.
Budget Projections for the Next Decade from the 2013 Budget Proposal.
Teachers are encouraged to introduce the topic of this lesson the day before working through the lesson in-class. Ask students to listen to the EconTalk podcast with Keith Hennessey in order to familiarize themselves with the topic. The EconTalk webpage for the podcast with Keith Hennessey also lists additional resources available on the web and on their homesite econlib.org, Students are encouraged to read these materials.
In preparation for the day's presentation and having listened to the Econtalk podcast, students should be ready to answer questions listed below in the assessment section at the beginning of class.
Next, students will be introduced to the specifics of the Budget Control Act of 2011. The summary will include the following:
- First, students will be shown how the President and Congress calculate their proposed spending cuts/tax increases through the Congressional Budget Office (CBO).
- Second, students will be asked to read or be presented with the specifics of the Budget Control Act (BCA).
- Students will then be shown how the CBO estimates the impact of each of the proposals.
- Next, we will go over the possible scenarios that the Joint Committee may consider.
- Finally, students will be asked some questions on what they have learned and give their opinion on what the Government should do in the future.
Each year the President of the United States presents a budget proposal. In the proposal, the President not only outline the spending proposals for the coming year but also for the next ten years. The CBO and the Office of Management and Budget take the information contained in the President's proposal, and estimate a baseline for outlays (spending) vs. revenues over the next 10 years and beyond.
The following graph shows the proposed budget path of the Federal Government beginning in Fiscal Year 2012. Over the next ten years the Federal Government, according to the CBO estimate of the President's Budget Proposal will spend around $46.1 trillion and take in an estimated $36.7 trillion in revenue. This means that the National Debt will grow by an estimated $9.4 trillion. The growth in spending and the increase in debt are important points to keep in mind as our analysis continues.
Next, ask students to visit the website keithhennessey.com and read his summary of the Budget Control Act OR use the information presented on the webpage to develop a presentation to give in-class. Hennessey also provides more in-depth analysis is two other posts (here and here ).
Some key points:
The Debt Ceiling was raised initially by $2.1 trillion; Congress soon added another $300 billion, bringing the total to $2.4 trillion.
There will be around $917 billion of spending cuts, which will take effect immediately.
- Congress appointed a joint committee, known in the media as a "Super Congress," to negotiate further cuts. The results of the committee were that no further agreements could be made. Therefore the automatic sequester was kicked in and an additional $1.2 trillion of cuts were made.
Questions over Econtalk Podcast.
Why was August 2nd, 2011 an important date? [Estimated date where the Treasury would have ran out of money to pay for all of their obligations.]
What is the difference between discretionary and non-discretionary spending? [Discretionary spending is appropriated on an annual basis. Non-discretionary spending is determined by a formula and does not change on a year-to-year basis unless Congress acts otherwise.]
How many different appropriations bills are passed annually as a part of the Annual Budget Resolution? [Twelve different appropriation bills are passed annually as a part of the Annual Budget Resolution.]
According to the President's budget proposal, how much will the government spend over the next 10 years? [The government will spend over $46 trillion in the next 10 years according to the President's budget proposal.]
- What is the difference between a cut in spending and a cut in the baseline? [A cut in spending would refer to a cut in what government is already spending, say cutting a program that already exists. A cut in the baseline refers to a cut in the proposed path of future spending. This would be akin to planning on spending $20,000 on a new car in 2 years and instead buying a car for $15,000, and then saying that you cut spending by $5,000.]
Questions on the Budget Control Act (BCA) of 2011.
Following the passage of the BCA, how much will the debt limit be increased immediately?
How much of the CBO baseline will be cut automatically before the Joint Committee meets?
If the Joint Committee fails to come up with a plan to reduce the deficit by November 23, what amount would be automatically cut from the budget?
Under the terms of BCA of 2011 by what percentage is a cut to Medicare capped?
Does the current baseline assume an increase in taxes, i.e. an expiration of the Bush-Obama tax cuts as part of its projections? If so, when do they expire?
The long-term fiscal problems of the United States still remain, even with the increase in the debt ceiling, (which was the largest increase in history) at current levels the debt limit will need to be increased again in January 2013. The United States Federal Government is set to borrow $2.4 trillion between August 1, 2011 and that time (January 2013). If, however, the economy does not perform as well as expected in the projections and tax revenues fall, raising the debt limit could become an issue right around the time that next president is being elected.
Check out these other Econedlink Lessons dealing with the Federal Budget.