Oh No, Not Again

The current fiscal showdown was actually a little different in that the House GOP and Senator Ted Cruz largely did not claim to be engaging in obstructionism in the name of reducing budget deficits. Indeed, their central demand—the wholesale rollback of the Affordable Care Act (ACA) would actually increase long-run deficits substantially.

But those days seem over and discussion after any short-term cease-fire on the continuing resolution (CR) and debt ceiling seems set to snap back to the Washington perennial of obsessing over long-run budget deficits. A clear sign that the nation’s political debate has shifted back to budget deficits is always that Erskine Bowles and Alan Simpson have launched a campaign calling on policy-makers to reduce deficits and are invited on talk shows and fawned over. Looks like we’re here again.

As comfortable as this makes Beltway pundits, it’s a disaster, since previous episodes where fiscal showdowns focused on budget deficits led to the radical austerity that has been so damaging to recovery from the Great Recession. Let’s recap.

The Budget Control Act of 2011 (BCA) became the law of the land when President Obama signed it on August 2, 2011. The BCA was the result of a threat by House Republicans to not raise the debt ceiling during the summer 2011 version of the fiscal showdown. The goal of the Act was to reduce budget deficits over the fiscal 2012 to 2021 period by over $2 trillion. Thus in the midst of an anemic recovery from the Great Recession with the unemployment rate at 9 percent, Congress and the President agreed to reduce federal spending beginning in October 2011 (the beginning of the 2012 fiscal year). These cuts, known as the discretionary spending caps, were specified in the BCA and would reduce fiscal 2012 budget authority by almost $70 billion (a 6 percent reduction) and 10-year budget authority by about $900 billion.

The BCA also established the Joint Select Committee on Deficit Reduction (popularly known as the Supercommittee) with a goal to “reduce the deficit by at least $1,500,000,000,000 over the period of fiscal years 2012 to 2021.” In the event the Supercommittee failed to achieve its goal, the Act specified that spending would be reduced by $1.2 trillion between fiscal 2012 and 2021. Of course, the Supercommittee failed because Democrats wanted more revenue raised than Republicans were willing to allow (basically none) and because Republicans wanted more mandatory spending cuts (mostly cuts to Social Security and Medicare) than Democrats would allow. (If all this sounds vaguely familiar, it should, because this is the debate Congress was engaged in all year before the showdown over the CR and the debt ceiling.)

The chart shown below provides a graphical representation of what the BCA has done and will do to discretionary spending. The top line shows the Congressional Budget Office’s (CBO) 2011 (before BCA) baseline projection of discretionary outlays as a percent of GDP. In the baseline, CBO assumes that discretionary spending will grow with prices. As can be seen, this assumption leads to discretionary spending actually falling relative to GDP over the 10-year budget window from 8.3 percent in fiscal 2012 to about 6.3 percent by fiscal 2021. In other words, the part of the government that administers programs, provides education and housing assistance as well as veterans benefits, funds medical and scientific research, runs the national park system, and enforces regulations* is projected to get smaller relative to the size of the economy.

Interactive chart

Discretionary outlays as a percent of GDP, 2012 to 2021

2011 baseline Original caps Revised caps/sequestration
2012 8.344724742% 8.183173854% 8.184230148%
2013 7.845263919 7.562063148 7.119064835
2014 7.527131333 7.184725205 6.586385004
2015 7.276313627 6.909210454 6.393688017
2016 7.022775179 6.642332014 6.14423423
2017 6.771539206 6.379477251 5.909545015
2018 6.591936526 6.181382046 5.727793154
2019 6.505428546 6.077323683 5.681913673
2020 6.391613121 5.947751099 5.579573892
2021 6.284950158 5.827052435 5.481286976

Source: Author’s calculations of CBO data

Show table Copy data to Excel Embed this chart Get image

The next line down displays the legislated trend in discretionary spending under the original BCA budget caps. Discretionary outlays are cumulatively reduced by almost $800 billion over 10 years and are projected to be 5.8 percent of GDP by fiscal 2021. The lowest line shows the projection for discretionary spending under the BCA sequester and reduced budget caps triggered by the failure of the Supercommittee. By fiscal 2021, discretionary spending is projected to be equivalent to 5.5 percent of GDP—lower than it has been at any time in the last 50 years.

These budget decisions have consequences for the well-being of the nation. The reduction in discretionary spending over the past two years has reduced the size of the federal deficit, but has had negative consequences for the nation. The budget caps and the fiscal 2013 sequester have resulted in at least 900,000 fewer jobs being created as well as reducing funding for educational assistance, housing assistance, and scientific research, among many other things.

*It should be emphasized that regulations are developed by the Administration to enforce laws passed by Congress.


  • benleet

    Obama’s policies have not recovered the previous 2007 economy, so he lacks bargaining power. He could have drawn the lines more clearly, arguing persistently the need for his Sept. 2011 American Jobs Act, a $450 stimulus. Repeating this message, another stimulus which would re-employ those who lost their jobs from the GR, he would have changed the present debate and its outcome. The employment to population ratio dropped from 63.4% to 58.3%, down 5.1%, between Dec. 2006 and Dec. 2009. In today’s working age population that’s 12.4 million unemployed workers, which means the economy dis-employed almost 9% of its daily number working. The employment to pop. ratio has recovered 0.3% after a 5.1% drop. He has to hammer away in many ways the “middle-out” growth strategy, but as of now, again, no one seems to understand what he’s talking about because his attention is on the federal debt, a very secondary issue compared to recovering employment for about 12 million workers, and more if you include the other unemployed and under-employed.