Understanding the Debt Ceiling Debate and the Budget Control Act of 2011

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.

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 Department 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."

Learn 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. Read and analyze the details of a summary of the Budget Control Act of 2011. Finally, assess your understanding of what you have learned and provide your own deficit reduction ideas for the future. Links to readings and other resources will be provided for further study. 

Homework Assignment: Visit the website http://www.econtalk.org/hennessey-on-the-debt-ceiling-and-the-budget-process/ and listen to the http://www.econtalk.org/hennessey-on-the-debt-ceiling-and-the-budget-process/ with Keith Hennessey on the Debt Ceiling and the Budget Process. Optional: Read through additional material provided on the site. After you have finished answer the following questions. (Found in Assessment Activity)

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 10 years.  The CBO and the Office of Management and Budget (OMB) 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 10 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 the students 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 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 negiotate 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. . 

The long-term fiscal problems of the United States 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. 

View Interactive Activity

Questions on Econ Talk Podcast: 

1. Why was August 2nd, 2011 an important date? 
2.  What is the difference between discretionary and non-discretionary spending? 
3. How many different appropriations bills are passed annually as a part of the Annual Budget Resolution? 
4.  According to the President's budget proposal, how much will the government spend over the next 10 years?
5. What is the difference between a cut in spending and a cut in the baseline? 

Questions on the Budget Control Act of 2011:

View Interactive Activity

1. Following the passage of the BCA, how much will the debt limit be increased immediately? 
2. How much of the CBO baseline will be cut automatically before the Joint Committee meets? 
3. 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? 
4. Under the terms of BCA of 2011 by what percentage is a cut to Medicare capped? 
5. 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?

Check out these other Econedlink Lessons dealing with the Federal Budget.