page_title: Budget Control Act of 2011
section_title: Projected and known impacts
hierarchical_section_title: Budget Control Act of 2011 / Projected and known impacts
caption_attribution_description: English: President Barack Obama signs the Budget Control Act of 2011 in the Oval Office, Aug. 2, 2011.
context_page_description: The Budget Control Act of 2011 is a federal statute enacted by the 112th United States Congress and signed into law by US President Barack Obama on August 2, 2011. The Act brought conclusion to the 2011 US debt-ceiling crisis.
  The law involves the introduction of several complex mechanisms, such as creation of the Congressional Joint Select Committee on Deficit Reduction, options for a balanced budget amendment, and automatic budget sequestration.
context_section_description: The act will not actually reduce the nominal U.S. debt over the 10-year period. But it will reduce the real (inflation adjusted) growth of the debt, by reducing real Federal spending (the amount of spending with inflation included). However, every plan will increase or keep constant nominal spending. That is partly because the cuts due to the act will not reduce federal spending in contemporary dollars, but rather reduce the year-to-year increases in spending from what had previously been anticipated. Even with the slowdown, both federal spending and the debt were still projected to grow faster than the U.S. economy, due to the cost curve effects of health care, which the act does not address. However, it is hoped that an independent cost-cutting board created by the Patient Protection and Affordable Care Act will begin to reduce per capita health spending once it is implemented in 2014.
  The debate on the bill was driven by the Republicans' insistence on spending cuts as their condition for agreeing to raise the debt ceiling. This raised concern because of the relationship between aggregate demand and unemployment; as Patrick Lunsford, Senior Editor of insideARM.com stated in a Forbes magazine blog, "when government spending is slashed, jobs are lost and consumer demand falls." In analyzing the specific bill that emerged, the Economic Policy Institute stated, "The spending cuts in 2013 and the failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer jobs in 2013, relative to current budget policy."
  Most of the $900 billion in the first tranche of cuts occur in future years and so will not remove significant aggregate demand from the economy in the current and following year. Only $25 billion in federal discretionary spending is required to be removed for 2012. Regarding the across the board cuts, these will take effect on January 2, 2013, unless the Republicans in the US House can agree on a substitute with the Democratic President and US Senate.
  Passage of the Budget Control Act of 2011 was not enough to avert, three days later, Standard & Poor's downgrading the nation's credit rating for the first time in the firm's history, from "AAA" (highest) to "AA+" (second highest). They said they were "pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics anytime soon." (The United States Department of the Treasury pointed out an error of $2 trillion in Standard & Poor's calculation of the ten-year deficit reduction under the Act, and commented, "The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.") S&P has partially disputed this claim of error, arguing that it is not as substantial as the Department of the Treasury is asserting, stating, "In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP)." They further state that they used a spending inflation rate of only 5 percent in their calculations which is actually lower than the 7 percent spending inflation rate the Budget Control Act of 2011 assumes. While the other two credit rating agencies (Fitch and Moody) kept the U.S. rating at AAA, they did change the rating outlook from "stable" to "negative".
caption: Congressional passage of the bill gave President Obama the chance to sign the Budget Control Act into law, which he did on August 2, 2011.
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