The US is in the midst of a fiscal crisis caused by the combination of reduced revenue due to the 2008-09 recession and increased expense caused by the 2008 fiscal stimulus bill. Federal debt held by the public has grown from $5 trillion in 2007 to $11 trillion today. The ratio of debt held by the public to GDP has risen from below 40% in 2007 to almost 80% today. Without a drastic change in course, the CBO predicts that ten years from now the ratio will climb to 90%, the highest level in postwar history (and utterly inconsistent with the AAA credit rating criteria of Moody’s and S&P).
There is no need to rehash the debate about whether President Obama or Speaker Boehner was responsible for the failure to reach a bipartisan “grand compromise” in the summer of 2011 during the debt ceiling crisis. In my opinion, Obama and Boehner were close, but both of them got too far out ahead of their House caucuses. Pelosi and Cantor each killed the deal: Pelosi, because it included Medicare reform, and Cantor, because it included a tax increase. What we got instead was the Budget Control Act of 2011.
The BCA provided that if Congress failed to adopt the Simpson-Bowles fiscal consolidation plan, automatic expense sequestration would occur in calendar 2013. In addition, the deal to extend the Bush tax cuts was set expire in 2013. This combination of automatic cuts plus an automatic tax increase is the much-feared “fiscal cliff” that hits the US budget and economy two months from now, unless Congress decides differently.
The Budget Control Act of 2011
The BCA specifies automatic procedures to reduce both discretionary and mandatory spending during the coming decade. Those automatic reductions will take the form of equal cuts (in dollar terms) in funding for defense and nondefense programs in fiscal years 2013 through 2021.