WASHINGTON (MNI) – The following is a summary of the U.S.
Congressional Budget Office’s report in which it estimated the changes
in discretionary and mandatory spending that would occur if the
automatic enforcement mechanisms were triggered because no new deficit
reduction legislation was enacted:

The Budget Control Act of 2011 (enacted on August 2 as Public Law
112-25) made several changes to federal programs and established budget
enforcement mechanisms-including caps on future discretionary
appropriations – that were estimated to reduce federal budget deficits
by a total of at least $2.1 trillion over the 20122021 period. The caps
on discretionary appropriations will decrease spending (including
debt-service costs) by an estimated $0.9 trillion during that period,
compared with what such spending would have been if annual
appropriations had grown at the rate of inflation. At least another $1.2
trillion in deficit reduction was anticipated from provisions related to
a newly established Congressional Joint Select Committee on Deficit
Reduction.

That committee is charged with proposing legislation to trim budget
deficits by at least $1.5 trillion between 2012 and 2021. However, if
legislation originating from the committee and estimated to produce at
least $1.2 trillion in deficit reduction (including an allowance for
interest savings) is not enacted by January 15, 2012, automatic
procedures for cutting both discretionary and mandatory spending will
take effect. The magnitude of those cuts would depend on any shortfall
in the estimated effects of such legislation relative to the $1.2
trillion amount.

The automatic reductions-if triggered-would take the form of equal
cuts (in dollar terms) in defense and nondefense spending starting in
fiscal year 2013. Those cuts would be achieved by lowering the caps on
discretionary budget authority specified in the Budget Control Act and
by automatically cancelling budgetary resources (a process known as
sequestration) for some programs and activities financed by mandatory
spending. The law exempts a significant portion of mandatory spending
from sequestration, however. The total savings attributed to the
automatic procedures would include lower debt-service costs resulting
from those cuts.

The Congressional Budget Office (CBO) has estimated the changes in
discretionary and mandatory spending that would occur if the automatic
enforcement mechanisms were triggered because no new deficit reduction
legislation was enacted. CBO’s analysis can only approximate the
ultimate results; the Administration’s Office of Management and Budget
(OMB) would be responsible for implementing any such automatic
reductions on the basis of its own estimates

CBO estimates that, if no legislation originating from the deficit
reduction committee was enacted, the automatic enforcement process
specified in the Budget Control Act would produce the following results
between 2013 and 2021:

* Reductions ranging from 10.0 percent (in 2013) to 8.5 percent (in
2021) in the caps on new discretionary appropriations for defense
programs, yielding total outlay savings of $454 billion.

* Reductions ranging from 7.8 percent (in 2013) to 5.5 percent (in
2021) in the caps on new discretionary appropriations for nondefense
programs, resulting in outlay savings of $294 billion.

* Reductions ranging from 10.0 percent (in 2013) to 8.5 percent (in
2021) in mandatory budgetary resources for nonexempt defense programs,
generating savings of about $0.1 billion.

* Reductions of 2.0 percent each year in most Medicare spending
because of the application of a special rule that applies to that
program, producing savings of $123 billion, and reductions ranging from
7.8 percent (in 2013) to 5.5 percent (in 2021) in mandatory budgetary
resources for other nonexempt nondefense programs and activities,
yielding savings of $47 billion. Thus, savings in nondefense mandatory
spending would total $170 billion.

* About $31 billion in outlays stemming from the reductions in
premiums for Part B of Medicare and other changes in spending that would
result from the sequestration actions.

* An estimated reduction of $169 billion in debt-service costs.

In all, those automatic cuts would produce net budgetary savings of
about $1.1 trillion over the 20132021 period, CBO estimates. That
amount is lower than the $1.2 trillion figure for deficit reduction in
the Budget Control Act for three reasons. First, because of the lag in
timing between appropriations and subsequent expenditures, part of the
savings from the automatic cuts in budgetary resources would occur after
2021. Second, CBO expects that some reductions-particularly those
related to Medicare-would have other effects that would boost net
spending (by the $31 billion mentioned above). Third, CBO estimates that
the reduction in debt-service costs would be lower than the amount of
such savings stipulated in the Budget Control Act.

The majority of the savings from the automatic spending reductions
would stem from further cuts in discretionary spending (beyond those
embodied in the new law’s caps on discretionary budget authority). CBO
expects that about 71 percent of the net savings from the automatic
procedures would come from lowering the caps on discretionary
appropriations, 13 percent would come from a net reduction in mandatory
spending, and 16 percent would result from lower debt-service costs.

Of course, the Budget Control Act could produce outcomes that are
very different than the figures outlined above. The Congress could enact
legislation originating from the deficit reduction committee that would
produce $1.2 trillion in savings through changes that differ
significantly from the automatic reductions that would be required in
the absence of such legislation. Or such legislation could yield some
savings, but less than $1.2 trillion, so the automatic procedures would
have a smaller impact than CBO has estimated here. Alternatively, the
deficit reduction committee could recommend, and the Congress could
enact, legislation saving significantly more than $1.2 trillion. (The
Budget Control Act states that the committee’s goal is to achieve at
least $1.5 trillion in savings over the 20122021 period.)

** Market News International Washington Bureau: 202-371-2121 **

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