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President Barack Obama signed into law Tuesday a measure to raise the debt ceiling and avert a potentially catastrophic default by the U.S. government.
The deal left much of the actual decision-making on cuts to a commission of 12, six Democrats and six Republicans, who are due to issue their recommendations around Thanksgiving.
The committee is charged with recommending ways to save up to $1.2 trillion over 10 years.
What does the plan do? The new law allows the government to keep borrowing and staves off an unprecedented default on obligations to investors, Social Security recipients, federal employees and others. But it comes at the price of squeezing the budget in ways that sooner or later will affect average families.
How does this affect the average citizen? “Average Americans are hurt the most in this,” said Robert Manning, founder of Rochester’s Responsible Debt Relief Institute. “There are no winners. This process, the way it was dragged out through political posturing, will result in higher interest rates, lower consumer confidence and lower business confidence. This did not help the people it was supposed to help.”
Where does this resolution leave ordinary Americans and businesses as to government debt and investor confidence? Lawmakers “didn’t make the tough decisions, and won’t until year’s end, if then,” said Ashok Rao, dean of the E. Philip Saunders School of Business at Rochester Institute of Technology. “As far as business goes, there’s still a lot of uncertainty about debt and that will affect the economy negatively. If Congress had come up with specifics about what to do about the debt, Wall Street and others might have more confidence. And that affects consumer confidence.”
What about senior citizens? Ann Marie Cook of Lifespan — an independent agency that helps older adults and their caregivers in the Rochester area — said that from her agency’s perspective, older adults are confused and concerned. They want and need health care and want to ensure that services are maintained.
The Social Security Administration issued a statement shortly after the law was signed noting that because of the deal there would be no delays in Social Security checks this month. Social Security Commissioner Michael J. Astrue noted that “should be a relief to those people who were concerned about their benefits.”
What happens to Medicaid and Medicare? Medicare and Medicaid were spared from immediate cuts in the debt deal, but it looks like just a temporary reprieve.
Advocates for seniors and lobbyists for the health care industry are worried that Round Two of the budget battle, beginning this fall, could lead to cuts that raise costs for beneficiaries and squeeze providers such as hospitals, doctors and insurers.
What is being cut now? More than $900 billion over 10 years from the day-to-day operations of Cabinet agencies. The law caps such “discretionary” spending at $1.043 trillion in 2012, $7 billion below 2011 levels, and $44 billion below an inflation-adjusted “baseline.”
After a near-freeze in 2013, discretionary spending would increase by about 2 percent a year.
What will those cutbacks and limits mean?
A reduction in spending, which is sure to spark infighting as defense hawks and backers of domestic programs wrangle over who gets the money that is available.
It’s up to the appropriations committees in Congress to allocate the money, picking winners and losers from among such programs as school aid, housing subsidies, defense, foreign aid and health research — among others.
Both security and nonsecurity programs would absorb outright cuts in 2012.
What else will be on the table? The second wave of spending cuts will likely focus on so-called mandatory programs whose spending levels are set by formula. They include Medicare, the Medicaid health program for the poor and disabled, farm subsidies and federal retirement programs.
Options include increasing copayments for Medicare and military health care and prescription drug coverage, cuts in direct cash payments to farmers, sales of broadcast spectrum to telecommunications companies and rules restricting insurance policies that supplement Medicare.
What impact does the growing federal debt have on ordinary citizens and business activity? “Even without a credit downgrade, increased borrowing by the federal government squeezes private borrowers out of the lending market,” said Mark Zupan, dean of the Simon Graduate School of Business Administration at the University of Rochester.
“Credit is harder to obtain, interest rates rise. More important, companies don’t hire. What Congress did this week is a step, as Neil Armstrong once said, one small step. But Americans have to realize that we’re not as far behind, or as different, from Greece as we might like to think.”
Doesn’t this save the nation’s credit rating? The U.S. may have avoided a possible debt default, but it may not be enough to maintain its coveted AAA debt rating, according to Fitch Ratings. Fitch expects to conclude its review of the U.S. sovereign rating by the end of August and it is possible the U.S. debt rating could be downgraded at that time, Fitch said.
Moody’s Investors Service took a similar stance Tuesday.
What happens after the commission makes its recommendations? If a majority of the committee agrees on a plan, it would receive a vote in both the House and the Senate. If the panel deadlocks or fails to produce at least $1.2 trillion in additional cuts, or if Congress fails to enact its recommendations, the White House budget office would impose spending cuts across much of the federal budget, including the Pentagon, domestic agency budgets and farm subsidies. Many federal benefits programs, however, would not be covered by this, including Social Security, Medicaid, and veterans and federal retirement benefits.
What about a balanced budget amendment? The House and Senate are required to vote on a balanced budget amendment to the Constitution; and the new law establishes “program integrity” initiatives aimed at stemming abuses in Social Security and federal health care programs.
How deep are the cuts to defense likely to be? Budget cutters may have to consider slashing such costly defense systems as the U.S. military’s replacement fighter jet or increase health care premiums for working-age military retirees. The staffing levels of all branches of the military are likely to be severely curtailed.
What is the likelihood of tax increases? Democrats, including President Obama, are seeking to use the next phase of deficit-reduction talks to raise taxes for private equity managers, oil companies and high-income earners. Those efforts will likely face continued opposition from Republicans.
Another factor: The Congressional Budget Offices revenue baseline, or yardstick, assumes that the Bush-era income tax cuts will expire as scheduled at the end of 2012. Extending most of the cuts and allowing high-income cuts to expire, as Democrats want, would be viewed as a tax cut. That’s because rates would be lower than those that take effect if Congress did nothing.
Don’t local universities get a lot of federal funding? What happens to that? A cloud of uncertainty hangs over the future of federal research dollars for the University of Rochester and Rochester Institute of Technology.
“The bottom line is that we don’t yet know how this bill will impact federal research funding,” said Mark Michaud, spokesman for the University of Rochester Medical Center.
For the fiscal year that ended June 30, UR received about $313 million in federal research funds.
Unlike entitlement programs, Congress is not typically required to fund many of the programs of the National Institutes of Health, National Science Foundation, Department of Energy and the Department of Defense — agencies and departments that provide almost of all UR’s federal research funds.
“There is concern in the scientific community that the cuts … will result in significant reductions in federal research spending,” said Michaud.
Similar sentiments were expressed by Ryne Raffaelle, vice president for research and associate provost at RIT.
“All federal agencies will be cutting. What that means is that there will be less available for universities,” said Raffaelle.
As is the case with UR, Congress is not required to fund most of the estimated $40 million a year in federal funds that RIT receives for research.
“Our biggest concern is that research funding will bear the brunt of the cuts that various federal agencies will make,” Raffaelle said.
He noted that RIT might be helped by the trend in federal funding to provide money for applied research, which is how many of RIT’s grant proposals are designed.
What happens to student loans? The maximum federal Pell grant of $5,550 will be preserved for an estimated 9 million undergraduates, according to the White House.
But to pay for that, graduate students who get federally subsidized loans will see the interest on these loans begin to accrue while they’re still in school, beginning July 1 next year.
Currently, interest on this category of federal loans doesn’t begin accruing until students graduate.
UR identified 1,375 of its graduate students as now receiving subsidized federal loans.
Figures were not available Tuesday on how many graduate students at RIT could be affected.
Includes reporting by staff writers Tom Tobin, Patti Singer, James Goodman and Washington correspondent Brian Tumulty; and by The Associated Press, USA Today and Bloomberg News.
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