August 4, 2011
The Budget Control Act of 2011 has become law – just in time to meet the August 2 Treasury deadline and reassure world financial markets. The framework of the new law is complex and shows that both Democrats and Republicans can claim some victories.
The federal deficit will be reduced by at least $2.1 trillion. That figure comes from the non-partisan Congressional Budget Office. The savings will be realized over a decade ... although it isn’t yet clear where the bulk of the cuts will be made.1
A bipartisan committee of 12 will have to recommend between $1.2 trillion and $1.5 trillion in additional federal budget cuts by November 23.
The debt ceiling will be raised by up to $2.4 trillion. It will be raised incrementally from the current $14.3 trillion level, dependent on a series of triggers:
· The first trigger: the bill’s passage. Congressional approval amounts to a formal declaration that the federal government is less than $100 billion away from hitting the debt cap. Now that the Budget Control Act of 2011 is law, President Obama is expected to immediately raise the debt limit by $400 billion.
· The second trigger: the initial $400 billion increase. This move initiates another formal request to hike the debt ceiling by another $500 billion dependent on Congressional authorization. It is widely assumed that Congress will disapprove this request, with President Obama vetoing the disapproval and Congress failing to override the veto. The probable outcome: the debt limit rises by the desired additional $500 billion.
· The third trigger: what Congress does by December 23. Here are the possibilities that could play out during the holiday season:
o If Congress fails to pass the deficit-reduction bill generated by the bipartisan committee of 12, then President Obama can formally request another hike in the debt limit – a $1.2 trillion increase. Congress would likely reject this request, President Obama would use his veto power in response, and Congress would likely fail to override the veto.
o If Congress passes the deficit-reduction bill, then President Obama gets automatic authority to raise the debt cap by an amount equivalent to the budget cuts defined in the new law.
o Alternately, if Congress passes a balanced budget amendment and sends it to the states, President Obama immediately gains the authority to raise the federal debt limit by $1.5 trillion.3
Tax hikes for the rich? Not immediately. In a key Republican victory, the two-step bill does not include tax increases or new levies for those in the highest tax brackets. House Speaker Boehner said July 31 that the forthcoming 12-member committee could not approve tax hikes – it would be “impossible” under current federal budgeting rules. Yet with the expiration of the Bush-era tax cuts increasingly probable in 2013 and the possible elimination of some deductions and exemptions in the tax code to generate additional revenue, there is a good chance many Americans will pay out more to the IRS in the near future. The White House says $1 trillion could be saved alone by not extending the EGTRRA/JGTRRA cuts further.5
December isn’t that far away. Expect more drama on Capitol Hill as 2011 ends, with a chance of added volatility in our financial markets.
We are sure that the above information can be somewhat confusing and overwhelming. We are still digesting this bill, as you probably are as well. Stay tuned for our upcoming newsletters to hopefully shed some more light on this as it unfolds, and for our commentary and opinion on what this all means and how it will affect that markets.
Sincerely, Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA Edward J. Kohlhepp, Jr., CFP®, MBA
“It is the duty of the patriot to protect his country from the government” - Thomas Paine
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Citations. www.petemontoya.com 1 - money.cnn.com/2011/08/01/news/economy/debt_ceiling_deal_cbo/ [8/1/11] 2 - npr.org/2011/08/01/138885258/congress-to-move-quickly-on-debt-spending-deal [8/1/11] 3 - blogs.abcnews.com/politicalpunch/2011/07/debt-ceiling-framework-where-they-landed.html [7/31/11] 4 - theatlantic.com/business/archive/2011/08/congress-needs-a-kinder-gentler-balanced-budget-amendment/242871/ [8/1/11]
5 - foxnews.com/politics/2011/08/01/tax-hikes-impossible-under-debt-deal-think-again/ [8/1/11] |