Out of Control Policy Blog

What You Won't Hear About the Debt Ceiling Deal

There is a lot of information flowing around today about the debt ceiling deal that has been struck in Washington. The headline is a $2.5 trillion cut in government spending for a $2.4 trillion increase in the debt ceiling, which will cover expenses in 2013. But there is a lot of smoke and mirrors play going on. Here are three things that you won't hear get covered by the mainstream press this week:

1) Government spending is going up over the next 10 years, not down. The cuts in federal spending are from the projected growth of spending over the next 10 years, not a reduction in current spending rates. Yes, the growth of federal outlays is slowing (a good thing), but the ultimate outcome is that spending levels stay about where they are right now 10 years out. To understand the fallacy here, consider that we could project government spending to increase $100 trillion a year for the next years, and then cap spending at just $1 trillion in annual expansion and call it a $99 trillion cut. 

2) According to the CBO, only $25 billion of the cuts from the 2012 budget, and just $47 billion will come from the 2013 budget. So in exchange for this two-year, $72 billion reduction in projected spending, the debt ceiling will go up $2.4 trillion over the same time frame. That is no dollar for dollar cut. The fact is that the debt ceiling hike is a two-year consideration and the spending cuts are spread out over 10-years. The cuts could be spread out over 50-years and Congress might claim the same thing as today, but that is not fiscal responsibility in the slightest.

3) The debate has not changed and is not over. President Obama will want to move past this by saying the debate is done and we can go on to new things. But, how this committee to find more cuts works will be very important, particularly a comparison to what they determine vs. the last debt commission (Simpon-Bowles) and their findings. Beyond that, the GOP will try to say that this is a win because taxes didn't go up and they weren't even considered at the end. But Democrats didn't abandon their desire for tax increases, instead they shifted to language about "saving" Medicare and Social Security... from cuts. The tone didn't change at all. Only when Washington decides to talk about reform for entitlements, include spending cuts to programs, as the means of saving them—and saving us from them—will the conversation have shifted.

Overall, I will praise the deal for including a cut to military spending, but in terms of dealing substantially with our long-term debt, this does little to nothing at all. Maybe that wasn't the goal, but if the conversation is over then we are in real trouble.

Here are a few more ways to look at the debt ceiling deal in its raw form that shine some light on its dark spots:

  • Spending cuts from the guaranteed $917 billion are heavily back-loaded, 2.4% come in FY 2012 ($25 billion), 5.1% come in FY 2013 ($47 billion), and 36.3% come in the last three years ($333 billion). This also means that only about 1 percent of the cuts from the total $2.5 trillion package of cuts will come in the next fiscal year. This is a positive outcome for the President since he doesn't risk a slow down in government spending causing a slow down in economic growth. And it is a false win for the Republicans who get their headline figure of trillions in cuts, but subject them to being changed by future Congresses.
  • If you consider the end of the Bush tax cuts on Dec. 31, 2013 as a part of this conversation (and why not, since the cuts we're talking about are in part for military spending that wasn't going to happen in the first place), then this deal is actually $2.5 trillion in cuts, $2.4 trillion in borrowing authority, and $2.8 trillion in new tax revenue. In their 10-year projections the CBO assumes the Bush tax cuts will end so when we talk about cuts from a 10-year baseline we are including that tax hike in the conversation. That is the balanced deal the White House wanted. 

A big question going forward will be how the super-Congress operations and finds it $1.5 trillion in deficit reduction. It is unlikely that any proposal will include tax cuts (because the House GOP will balk), but cuts of $1.5 trillion for entitlements by Thanksgiving are not exactly a very likely outcome.

Update (2:30pm):

Rep. Ron Paul wrote a piece for The Hill that summarizes my first point in a different way:

the "cuts" being discussed are illusory, and are not cuts from current amounts being spent, but cuts in projected spending increases. This is akin to a family "saving" $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda. But this is the type of math Washington uses to mask the incriminating truth about their unrepentant plundering of the American people.

See the whole piece here.

Anthony Randazzo is Director of Economic Research


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