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Agreement Struck, But Debt Deal Not Yet Done

August 1, 2011

On Sunday, July 31, President Obama and Congressional leaders agreed to raise the current federal debt ceiling of $14.3 trillion in two stages by as much as $2.4 trillion. The legislation is crafted to avoid having a vote on lifting the debt ceiling again until after the November 2012 elections.

The Senate is expected to vote on and pass the deal today, although not without criticism of the compromise from both sides of the aisle. House Republican and Democratic leaders will meet today with their caucuses to discuss the deal. House Speaker John Boehner (R-OH) has promised to move the bill quickly once it is passed by the Senate, but passage of the legislation is not yet assured. House Democrats, particularly progressives, are unlikely to support the agreement because of the scope of the cuts to discretionary spending and potential entitlement reform. It is unclear if Speaker Boehner has enough Republican votes to pass the bill without Democratic support.

While some Washington insiders remain doubtful Boehner will find enough votes, Wall Street is optimistic. The Dow Jones industrial average gained in the first few minutes of trading Monday morning, as did the S&P 500 stock index, Nasdaq and Asian and European markets. Even if the deal is approved, however, markets are concerned that the U.S. credit rating may still see a downgrade.

Pell Grant Funding Protected

The deal includes protections to maintain the maximum Pell Grant award at its current level of $5,550. Both the House Republican (Boehner plan) and Senate Democratic (Reid plan) deficit reduction and debt ceiling proposals included funding to prevent cuts to the Federal Pell Grant program for the 2012-13 academic year. The Pell Grant funding provision became a point of contention last week for House conservatives who voted against the Boehner plan, but over the weekend negotiators protected the program as they crafted the final agreement.

The $17 billion in Pell Grant funding in the legislation is primarily paid for by eliminating the in-school interest subsidy for graduate student loans—the Congressional Budget Office (CBO) estimates that eliminating the subsidy would yield $18.1 billion over the next ten years. If these funds were not directed to saving the Pell Grant program, there would not have been enough money to adequately fund the $5,550 maximum grant next year.

Because of the way the Pell Grant program is funded and because of the Pell “shortfall,” other federal student aid, research, and education programs would have been impacted above and beyond scope of the budget cuts agreed to in the debt ceiling package were the special provision not included. The Pell Grant program runs a shortfall because recent appropriations bills have not provided sufficient funds to cover the program’s costs yet all eligible Pell Grant recipients are "entitled" to aid.

Agreement Lifts Ceiling, Cuts Spending in Stages

The White House released a fact sheet on the compromise, and other details emerged early Monday morning. Elements of the agreement include:

  • Immediate 10-year discretionary spending caps generating nearly $1 trillion in deficit reduction, with a firewall between defense and discretionary spending. Domestic programs cannot be cut to raise defense spending.
  • The debt ceiling would immediately increase by $900 billion. A second installment, between $1.2 trillion and$1.5 trillion, will be available at the President’s request, probably early next year, thus eliminating the need for further increases until 2013. Congress could vote to block the second portion, but it is unlikely that there is a veto-proof majority to prevent Presidential action.
  • A bipartisan committee will be established to find an additional $1.5 trillion in deficit reduction, including from entitlement and tax reform. The committee is required to report legislation by November 23, 2011 and Congress must vote on it by December 23, 2011.
  • If Congress cannot agree on a $1.5 trillion plan, an enforcement mechanism will trigger spending reductions beginning in 2013 – split 50/50 between domestic and defense spending. Enforcement protects Social Security, Medicare beneficiaries, and low-income programs from any cuts. The trigger is designed to displease both Republics and Democrats.

Deficit Talks Slowed FY12 Appropriations Progress

The Senate Appropriations Committee has, by and large, been waiting for the debt ceiling negotiations to end before scheduling markups for FY12 spending bills. In the House, Republicans have made significant progress, with a goal of cutting $30 billion from discretionary spending this year; they have passed more than half of the requisite twelve budget bills. However, the debt ceiling agreement sets spending for fiscal 2012 about $24 billion higher than the amount approved by the House-adopted budget resolution. While cuts will be inevitable, they will not be of the magnitude House Republicans had been seeking.

Make no mistake, however, the federal budget is shrinking and all domestic programs will be competing for smaller shares—this includes federal student aid, research, science, and education programs. While the agreement stuck over the weekend will keep the government running and prevent a predicted economic catastrophe, the impact on specific programs will become clear as appropriators focus on the FY12 budget this fall and the bipartisan committee begins its work to find an additional $1.5 trillion in savings.

Contact

Liz Clark
Director, Congressional Relations
202.861.2553
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