What the Debt Ceiling Deal Means for Consumers

What’s likely to happen if Republicans or Democrats, or neither of them, get their way.

By + More

Think the summer's debt ceiling showdown was tough to watch? That was simply posturing and politicking over theoretical outcomes. It may have made the average American's head hurt, but the average consumer's wallet was uninjured. Well, those hazy, crazy summer weeks may soon seem like the good old days. Now Congress gets down to the business of making it real, and how this budget fight turns out will touch America where it lives. There are several ways this can go. We could all be winners or we could all be losers or, more likely, we're all in for a another roller-coaster ride.

This fall, a congressional "supercommittee" of six Republicans and six Democrats will meet in an attempt to create $1.5 trillion in savings over the next decade. The group was of course borne out of the hard-fought Republican standoff this summer with President Barack Obama over the U.S. debt ceiling.

At the time, House Republicans refused to allow the United States to borrow more money without deep cuts to spending. They also refused to raise taxes as a source of new revenue. The standoff was eventually resolved and the debt ceiling was raised. Yet just days later, Standard & Poor's downgraded U.S. treasury notes for the first time ever, citing political infighting as a threat to the long-term fiscal health of the United States.

[See Who's Worse Off: Europe or the United States?]

The S&P downgrade makes the work of the supercommittee all the more urgent. This time, the debate over how to cut spending is not just political: These spending cuts will have a serious impact on the bottom line of American consumers. If the Republicans get their way, funding for entitlement programs like Medicaid will be cut. If Democrats get their way, taxes will go up for some Americans. And if the two sides can't find common ground, automatic spending cuts will be triggered that would affect hundreds of thousands of military service members.

"When you talk about spending caps and supercommittee and sequestrations, it all sounds pretty good and pretty big," says Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "But we have to move into the specifics and everyone has a favorite thing they want to protect."

[See What the Economy Looks Like at Stall Speed.]

If Republicans get their way. Throughout the debt ceiling debate, Republicans refused to consider tax increases as a new source of revenue. Most Republican members of the House and Senate have signed a pledge not to raises taxes in any instance. Instead, Republicans argue that cuts should come from entitlement programs. A 2012 budget drafted earlier this year by House Republicans proposed to cut benefits for future enrollees in both Medicare and Social Security. They also demanded these cuts during the debt debate.

Republicans insist that current Social Security and Medicare beneficiaries—many of whom are retired and vote—would not be affected by the cuts. But James Horney, vice president for federal fiscal policy at the Center on Budget and Policy Priorities, says that any cuts to Medicaid, the program that provides healthcare to low-income people and families, would be felt immediately.

"Cuts in Medicaid could have an immediate impact both on beneficiaries and on the states. It's a joint federal-state program, and a number of the proposed changes in Medicaid would shift cost to the states," Horney says. "People would feel it because states would have to cut benefits."

And while current Social Security and Medicare beneficiaries would not feel the pinch immediately, future beneficiaries would receive reduced benefits. MacGuineas says a number of dramatic changes are needed if the government wants to achieve real savings. "We have to talk about raising the retirement age, about people paying for their own Medicare, and about changes to Medicaid," she says. "Everything is going to have to be scaled back."

[See 3 Arguments for Delaying Retirement.]

If the Democrats get their way. During negotiations to raise the debt ceiling, Obama offered to cut entitlement spending in exchange for tax increases, but Republicans refused. Even though the deal fell through, liberals in Congress were furious with the president for offering to cut entitlement spending, which has become a sacred cow for some Democrats. Instead, Democrats want to close loopholes that give tax breaks for corporate expenses like private jets. They also want tax increases for the richest Americans.