Why spending caps don't always deliver as promised

(SOURCE: AP)

At first glance, the deficit trigger may seem like the Sword of Damocles: If the supercommittee fails to come to a deal, the country faces $1.2 trillion in automatic, across-the-board spending cuts, though the big entitlement programs are largely spared.

But even such across-the-board cuts may not deliver the savings as promised. According to new figures from the Congressional Budget Office, the results would produce net savings of $1.1 trillion, not $1.2 trillion as outlined in the bill. And the gap could prove even wider than that.

That $100 billion difference may seem like small change in terms of the entire federal budget. But the reasons that CBO gives for the shortfall are telling. The first is technical: The CBO only estimated savings within a 10-year period, so savings after 2021 were not included. Also, the CBO estimates that some of the automatic cuts would actually increase net costs because of how some programs are structured.

Because of payment formulas in Medicare Part B, for instance, reducing spending also lowers the amount of money that comes in through premiums. Altogether, reductions to Medicare Part B and other programs end up raising net spending by $31 billion. (And that’s with a cap in place that limits most reductions in Medicare to 2 percent, except for Medicare providers.) As result, the federal government will have less money to pay down its debt service, which is another part of the triggered deficit reduction.

The CBO’s findings make it clear why thoroughly deliberated reforms are far preferable to just bringing down the hammer — that is, if you really want to get anywhere with reforming entitlements, lowering health care costs and reducing the medium- and long-term deficit. Across-the-board spending cuts can have uncertain and unintended consequences. And that doesn’t even broach what may be the biggest unintended consequence:savings that are never achieved because the trigger’s cuts are so deep that they provoke interest groups or constituencies who have the power to convince members of Congress to say “no.”