Two Government Funding Scenarios Under the Debt Limit Deal
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The newly enacted Fiscal Responsibility Act (FRA), which suspends the debt limit through January 1, 2025 and places caps on discretionary spending for the next two years, includes an enforcement provision designed to incentivize lawmakers to enact regular, full-year appropriations bills in a prudent manner. If Congress has not passed all 12 appropriations bills by January 1, 2024 (for Fiscal Year 2024), or January 1, 2025 (for FY2025), then automatic spending caps will take effect at levels 1% below what was enacted for FY2023 appropriations. Lawmakers would then have until April 30 to enact full-year appropriations before the 1% cuts are locked in for the remainder of the year.
The inclusion of this enforcement mechanism could be an implicit acknowledgment by lawmakers that bipartisan agreement on spending levels will be difficult even with spending caps in place: some Democrats are concerned that non-defense discretionary spending is too low under the deal, some Republicans are frustrated that the FRA did not cut non-defense spending enough—and members of both parties are worried that defense spending is too low under the caps.
In the past 47 years, Congress has passed all 12 appropriations bills before the start of the fiscal year (October 1) just four times. When a continuing resolution (CR) is needed to prevent a government shutdown, the average CR length over those 47 years has been 137 days per year—more than four months.
The enforcement provision in the FRA should serve as an incentive for lawmakers to complete full-year appropriations within the first 90 days of the fiscal year because:
- The automatic 1% cut that takes effect on January 1, absent full-year appropriations, would significantly cut defense spending relative to the FRA’s caps—a result lawmakers in both parties will likely want to avoid.
- Enacting full-year appropriations could unlock a number of side agreements that could increase non-defense spending by at least $40 billion over the next two years—around $21 billion each year—a result many in Congress would likely be pleased with.
In short, there are incentives for both Republicans and Democrats to reach a full-year appropriations deal before the 1% cuts from FY2023 levels take place on April 30 of each year.[1]
The following table compares what spending caps could look like under two scenarios versus the Congressional Budget Office’s pre-FRA baseline:
- Full-year appropriations passed between October 1 and April 30 of a fiscal year (i.e., at FRA cap levels); or
- A full-year continuing resolution (CR), or appropriations passed between May 1 and September 30 of a fiscal year (i.e., an automatic 1% cut from FY2023 levels):
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Two Government Funding Scenarios Under the Debt Limit Deal
| Pre-FRA Baseline (CBO, May 2023) | FRA Caps (All 12 Appropriations Bills Passed Oct. 1 – Apr. 30) | Auto 1% Cut (All 12 Appropriations Bills Passed May 1 – Sep. 30 OR Full-Year CR) |
|
|---|---|---|---|
| Defense Discretionary | |||
| Discretionary Cap (budget authority; billions) | FY2024: $884 FY2025: $907 | FY2024: $886 FY2025: $895 | FY2024: $850 FY2025: $850 |
| Savings Relative to Baseline (budget authority; billions) | N/A | FY2024: -$2 (spending increase relative to baseline) FY2025: $12 | FY2024: $34 FY2025: $57 |
| % of Total Discretionary Budget Authority | 52% | 56% | 54% |
| Non-Defense Discretionary | |||
| Discretionary Cap (budget authority; billions) | FY2024: $816 FY2025: $835 | FY2024: $704 FY2025: $711 | FY2024: $736 FY2025: $736 |
| Savings Relative to Baseline (budget authority; billions) | N/A | FY2024: $112 FY2025: $124 | FY2024: $80 FY2025: $99 |
| % of Total Discretionary BA | 48% | 44% | 46% |
| Potential Additions (budget authority; billions) | N/A | Commerce Expenses Fund: $22 Spending From IRS Rescissions: $20 | N/A |
| Total | |||
| N/A | FY2024: $110 FY2025: $136 | FY2024: $114 FY2025: $156 |
Congress has yet to begin the process of passing discretionary appropriations bills for FY2024, and the final appropriations agreements will likely provide for spending (budget authority) above the levels outlined in the table above—both due to the aforementioned side agreements and emergency supplemental spending for both defense and non-defense, which is not subject to the caps.
If the FRA induces Congress to pass all 12 appropriations bills before May 1 (or even January 1) of the next two years, policymakers may determine this automatic 1% cut is an incentive worth keeping. Recent appropriations activity in the House, however, suggests post-FRA discretionary spending negotiations will still be contentious and time-consuming. House Republicans have proposed setting non-discretionary spending for FY2024 at levels significantly below the FRA’s FY2024 cap, setting off a renewed debate over the levels recently agreed to on a bipartisan basis.
One near certainty is that any bipartisan deal on appropriations will come down to the wire. Of the nine years in the past 20 where full-year appropriations were completed before January 1, eight were completed in the final two weeks of December. Only time will tell whether this automatic cut will be the budget incentive that keeps on giving, or if Congress will find coal in their stockings this year (or next).
[1] The January 1 date appears not to hold much significance, since lawmakers could enact full-year appropriations between January 1 and April 30 that reverse the 1% cuts, before any sequester takes effect that would implement the 1% cuts.
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