August 2, 2011 / 5:33 PM / 6 years ago

Scenarios: Next steps in carrying out new budget deal

WASHINGTON (Reuters) - It's been a long hard struggle, but the Congress finally passed a debt limit increase that also envisions more than $2 trillion in deficit reductions over the next decade. Now the work begins.

Over the next several months, lawmakers and the Obama administration will fight over how to accomplish the biggest chunk of savings -- around $1.5 trillion on top of the $917 billion first installment. Experts are uncertain about the exact figure in total savings the package will yield, but the Congressional Budget Office says it will be at least $2.1 trillion.

Longer term, Washington must figure out a way to put the federal government on a more fiscally sustainable path and reverse the trend of annual deficits that have been in the range of $1.5 trillion.

But with the 2012 presidential and congressional election season starting to heat up, many budget-watchers think meaningful decisions will be kicked down road, and that Congress has squandered an opportunity to reach a grand deal that would have saved at least $4 trillion over a decade.

Here's what to look for:


* Leaders in the Senate and House of Representatives appoint the 12 members of a newly created panel to find the additional $1.5 trillion in savings. The bipartisan members of Congress are expected to look at tax reform and major benefit programs, such as Medicare and Medicaid healthcare for the elderly, disabled and poor.

The members are to be named within two weeks of the legislation being enacted.

Republicans vow to appoint members who will block outright tax increases, such as eliminating tax breaks for the wealthy, Wall Street financiers and some corporations. But they say they are open to reforming the tax code in a comprehensive way -- a difficult task to achieve by the committee's November 23 deadline.

The panel has plenty of research to draw upon: a presidential commission, several other independent commissions, and a bipartisan group of six senators that separately came up with a mix of spending cuts and tax increases to stabilize the budget.

* If the panel deadlocks, automatic spending cuts that neither party wants to see would be triggered: half in defense and other security-related spending and half in other domestic programs.


* If Democrats cannot win congressional approval of some revenue increases, Obama could refuse to sign legislation to continue the 2001 and 2003 tax cuts for the wealthy beyond 2012 when they expire. He has vowed to retain the Bush-era tax cuts for the middle class.


* The deal forces votes in the House and Senate on a balanced budget constitutional amendment. It likely will fall short of the two-thirds vote it needs to pass in the House and Senate. Even if it wins congressional approval, at least 38 of the 50 state legislatures would have to back it as well for the measure to be added to the Constitution.

This requirement was written into the debt limit deal to attract Republican votes.


The House and Senate Appropriations committees will have to write bills that actually carry out the first $917 billion in savings, achieved by holding the growth of discretionary spending below the rate of inflation. They will write a series of bills for fiscal 2012, which starts on October 1, and fiscal 2013 starting a year later.

Both Democrats and Republicans think the debt limit deal will make this process a little smoother and will avoid the threat of government shutdowns that Republicans exploited earlier this year.

Here's why: With the new debt and deficit-reduction law, both parties are signing off on top-line spending levels for the various government agencies and the appropriations panels will not have to wait for each chamber to write their competing budget blueprints before moving forward with annual appropriations bills.

However, the House and Senate could clash over funding levels for dozens of individual programs, from job training to foreign aid.


In one of the few victories for Democrats, the debt limit bill calls for defense spending cuts after years of major increases. Defense spending currently accounts for about one-fourth of the $3.7 trillion annual budget.

Defense contractors and others who are protective of robust military spending already are looking for ways around deep cuts. The new legislation, at least initially, allows appropriators to consider cutting other "security" programs deeply, instead of the Pentagon.

That's exactly what the House Appropriations Committee is doing for fiscal 2012. It is pushing a bill that would cut State Department funding -- one of the "security" parts of the budget -- by $8.5 billion next year, 18 percent below fiscal 2011 levels and 22 percent below President Barack Obama's request.

Pentagon funding, meanwhile, would be $17 billion above last year's level, under the House plan.


Major initiatives usually play out over several stages in Washington. Just look at the multiple civil rights laws that were enacted in the 1960s and are still being refined periodically. The same goes for environmental laws that have been evolving over the past few decades.

Efforts to tame out-of-control budget deficits -- caused by tax cuts, unfinanced wars, growing government spending and a bad economy -- likely will also take many years.

First, Congress put a stop to some of the special-interest spending, known as "earmarks," that were a pittance of the deficit problem. But banning them was a symbolic first step.

Then, Congress passed a stopgap funding bill in April with tens of billions of dollars in savings. Now comes the approximately $2.4 trillion in spending cuts.

The budget will be a major issue debated in the upcoming presidential and congressional campaigns. Depending on the outcome, look for another big push in 2013 for more spending cuts, tax increases or both.

Editing by Jackie Frank

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