On Aug. 2, 2011, President Obama signed into law the Budget Control Act of 2011 (the Act). The Act raised the federal debt ceiling by $2.1 trillion and prevented the U.S. government from defaulting on its financial obligations. Click here to view the Act.

Under the Act, Congress may not consider a bill, joint resolution, amendment, motion or conference report that would cause the discretionary spending limits set by the Act to be exceeded. The Act calls for a two step process. Step 1 calls for discretionary spending caps to save $917 billion over 10 years: $741 billion in discretionary spending savings; $156 billion in debt service payment savings; and $20 billion in mandatory spending savings. Step 2 establishes the appointment of a 12 Lawmaker committee (the Joint Select Committee) to identify an additional $1.5 trillion in savings over 10 years. The Joint Select Committee must find at least $1.2 trillion in savings or else mandatory cuts will be enacted.

The $917 billion in cuts will directly impact domestic and defense spending. Further cuts in the amount of $1.5 trillion will be determined by the Joint Select Committee. Social Security, Medicaid, unemployment insurance, programs for low income families, and civilian and military retirement funds will be exempted from cuts.

Below are overviews of two sectors likely to be impacted by the $917 billion in cuts; background on the framework of the Joint Select Committee; and industries this Joint Select Committee is likely to target to accomplish the $1.5 trillion in cuts.

Two Sectors Likely to be Impacted by Cuts

Defense: The Act aims to cut $350 billion (or nearly 40 percent of the initial $917 billion in cuts) from the defense budget over the next 10 years.

Health Care: The Act does not enact any immediate cuts to Medicare as part of Step 1. However, if the Joint Select Committee fails to curtail spending by $1.2 trillion by Jan. 15, 2012, or if Congress does not send a balanced-budget amendment to the states, the Office of Management and Budget is tasked with trimming Medicare payments to hospitals, doctors, and insurance companies. The Act establishes a cap on Medicare cuts of 2 percent, but it requires those decreases to be shouldered by doctors, hospitals, and providers.

The Joint Select Committee

Under the Act, Senate Majority Leader Harry Reid, Minority Leader Mitch McConnell, House Speaker John Boehner, and Minority Leader Nancy Pelosi will each appoint three members of their caucuses to a bi-partisan panel of 12 Lawmakers. The Joint Select Committee has authorization to hold hearings, produce witnesses, take testimony, and administer oaths.

The Joint Select Committee must be established no later than Aug. 16, 2011, hold its first meeting no later than Sept. 16, 2011, and issue recommendations by Nov. 23, 2011. Congress must vote on the Joint Select Committee recommendations no later than Dec. 23, 2011, and implement those recommendations by Jan. 15, 2012. If legislation from the Joint Select Committee does not reduce projected spending by at least $1.2 trillion, automatic reductions totaling this amount will be enacted.

Where is the Joint Select Committee Likely to Make Cuts?

Defense: The Joint Select Committee is likely to analyze defense accounts, which make up more than half of all federal discretionary spending. The Department of Defense is likely to experience cuts up to $850 billion.

State and Local Spending: The Joint Select Committee’s cuts at the federal level are likely to impact the amount of federal funds that flow to the states and local governments through a variety of programs.

What’s Next?

The vast majority of cuts will come from decisions made by the Joint Select Committee. At this time, there is a great deal of uncertainty since the Joint Select Committee members have not been announced and it will be difficult to predict the types of compromises they must reach to achieve the $1.5 trillion in cuts over 10 years.

In the coming months, businesses and interest groups have the ability to meet with the Joint Select Committee staff and their Congressional delegations to discuss the impact potential cuts may have on them.