Understanding the Bipartisan Budget Act of 2015

The Bipartisan Budget Act of 2015 (BBA-15) is a bipartisan compromise that averts a government default and provides a measure of certainty for federal discretionary programs over the next two years. However, it fails to address our fundamental long-term fiscal challenges. On our current path, in 25 years, CBO projects that debt will grow to more than 100 percent of GDP under current law and to a staggering 175 percent of GDP under less optimistic assumptions.

Policymakers should build on the bipartisanship of the BBA-15 to work towards passing fiscal reforms that will put our nation on a sustainable fiscal path.

WHAT ARE THE OUTCOMES OF THE BIPARTISAN BUDGET ACT OF 2015?

Establishes Bipartisan Agreement on Fiscal Policy. After months of partisan battles, the House and Senate came to a long-awaited agreement on budgetary spending levels. President Obama signed the agreement into law on November 2nd.

Addresses the Debt Ceiling. The agreement suspends the debt ceiling through March 15, 2017. Failing to suspend the debt ceiling would have been a serious, self-inflicted wound to the economy. The economic consequences of default would have been severe. In a 2013 study commissioned by the Peter G. Peterson Foundation, Macroeconomic Advisers estimated that a default could push the economy back into recession, raise the unemployment rate, and put 3 million people out of work.

Increases Discretionary Funding in 2016 and 2017. The agreement raises the caps on discretionary funding by $50 billion in 2016 and by $30 billion in 2017. The increases in the caps are allocated equally between defense and non-defense discretionary programs. The agreement does not change the discretionary funding caps after 2017.

Reduces the Likelihood of a Government Shutdown. By establishing an overall levels for discretionary spending in 2016 and 2017 the new law reduces the likelihood of a government shutdown during the next two years. However, lawmakers still must come to an agreement on annual appropriations for both of these years.

In 2016, the spending caps on defense and non-defense programs each rise by $25 billion; in 2017, their respective increases are $15 billion. In the context of total capped discretionary spending of over $1 trillion, these increases amount to less than 5 percent in 2016 and less than 3 percent in 2017.

Not all discretionary spending is counted against the budgetary caps. The largest category of funding not subject to the caps is for Overseas Contingency Operations (OCO). OCO mainly provides resources to the Department of Defense to oversee combat operations in Afghanistan, and the Department of State also receives some of these funds. Other non-defense categories not subject to the caps include: funding for disaster relief, program integrity initiatives, and other emergencies. In budgetary tables, OCO, disaster relief, and program integrity are recorded as adjustments (effectively, additions) to the capped amounts.

OCO funding will be ultimately determined through the appropriations process. However, BBA-15 provided guidance for the appropriators, setting target OCO funding at $74 billion in 2016 and 2017 with $59 billion allocated to defense programs and $15 billion allocated to non-defense programs. It is widely expected that those amounts will be the starting point for negotiations during the appropriations process. Other (non-OCO) adjustments to non-defense funding are expected to add an additional $14 billion.

Assuming that these OCO allocations are enacted into law during the appropriations process and that the other adjustments match CBO’s current-law baseline projections, total discretionary funding is projected to rise from $1,116 in 2015 to $1,154 in 2016 and $1,157 billion in 2017.

Offsets to the Increases in Discretionary Spending. The Bipartisan Budget Act of 2015 includes a number of provisions that offset the increase in discretionary spending over 10 years. The major offsets include:

• Extending reductions in direct spending through sequestration of certain mandatory programs (most notably Medicare) by one year to 2025;
• Changing federal health programs, including lowering Medicare reimbursements for new off-campus hospital outpatient departments and repealing automatic enrollment in employer-based health insurance plans that was mandated by the Affordable Care Act;
• Improving tax compliance by partnerships;
• Increasing premiums for federal pension insurance provided by the Pension Benefit Guarantee Corporation and making other changes in pension law;
• Selling federal assets, including the auction of broadcast spectrum and the drawdown and sale of petroleum from the Strategic Petroleum Reserve;
• Other changes including requiring certain medical reviews under the disability insurance program and reducing payments under the crop insurance program.

In the aggregate, the increases in discretionary spending during the first two years are fully offset over the subsequent 8 years — according to CBO, the net budgetary cost of BBA-15 is zero1. However, most of the costs are financed in 2025 as a result of extending the sequester of Medicare and other mandatory programs. Whether future Congresses will follow current law and keep the sequester through 2025 is unknown.

FISCAL ISSUES REMAINING TO BE ADDRESSED IN 2016

Funding the Government for the Remainder of the Fiscal Year. The agreement sets new discretionary spending limits, but it does not actually provide funds to keep the government operating beyond December 11. Congress and the President must adopt separate appropriations bills before December 11, 2015, allocating resources among the agencies and discretionary programs. By raising the overall level of the defense and non-defense spending, the BBA 2015 provides a framework for the appropriations process, which will now determine the spending levels of each agency, program and activity.

Expiring Tax Provisions. The agreement did not address or extend the 53 provisions that expired at the end of calendar year 2014 or during this year. The expiring provisions include items such as the tax credit for research and experimentation and bonus depreciation (which allows businesses to write off new capital investments faster). Lawmakers can enact extenders with retroactive effective dates and have done so in recent years. However, because they have still not acted on these policies, the tax code for 2015 remains uncertain more than 10 months into the year — this uncertainty greatly diminishes the value of the provisions as incentives.

Broader Tax Reform. The Bipartisan Budget Act also does not include more general reforms to our tax code. Many believe that our tax code has become excessively complex and riddled with inefficient tax preferences that keep marginal tax rates unnecessarily high, revenues too low, and disproportionately benefit high-income taxpayers. Eliminating “tax expenditures” through comprehensive tax reform could result in a number of changes to our tax system, including lower marginal rates, more competitive and pro-growth policies, adjustments to the distribution of the tax burden, and additional revenues to help address our long-term fiscal challenges.

Long-Term Fiscal Challenges Remain. The agreement does not improve our long-term debt outlook, because it does not address the fundamental drivers of our fiscal challenges, including the major health programs, Social Security, and insufficient levels of revenue. In order to put the nation on a sustainable fiscal path for the long term by stabilizing the debt, policymakers will need to take action that reconciles federal spending with revenues.

LAYING A BIPARTISAN FOUNDATION FOR FISCAL PROGRESS?

While this agreement does not address the fundamental drivers of America’s long-term fiscal challenges, it does represent bipartisan fiscal policy and a welcome resolution to important fiscal deadlines. Lawmakers should use this agreement as a foundation for future bipartisan collaboration to stabilize our national debt over the long term.

1Based on CBO’s scoring method, additional interest costs resulting from the BBA-15 are excluded from this calculation. The additional interest costs would be less than $20 over the 10-year period. The additional debt and interest costs are the result of the timing differences between the spending in the early years and the offsets occurring in the later years. (Back to citation)