President Signs Compromise Fiscal Responsibility Act: Debt Ceiling Suspension Paired with Spending Caps Enforced by Sequestration

After weeks of tense negotiation between the White House and House Speaker Kevin McCarthy (R-CA), the Fiscal Responsibility Act, H.R. 3746 (the Act) has passed both chambers of the U.S. Congress and awaits President Biden’s signature. The compromise agreement pairs a two-year suspension of the $31.4 trillion debt ceiling (through January 1, 2025) with cuts in federal spending. The agreement automatically reinstates the debt limit to the amount of debt outstanding on January 2, 2025; defense and nondefense discretionary spending would be subject to caps — allowing for certain exceptions — which would be enforced by sequestration. The legislation also makes several policy changes, including: a rescission of a portion of funds provided to the IRS in the Inflation Reduction Act that cover enforcement activities through 2031; a rescission of $27 billion of budget authority from a broad collection of accounts related to the federal government’s response to the COVID-19 pandemic; an overhaul of permitting reviews for energy projects; and higher age limits for work requirements on certain federal safety net programs. The legislation also codifies pay-as-you-go (PAYGO) requirements for the executive branch. The agreement, in large part, averts significant cuts to federal spending and preserves President Biden’s key climate, infrastructure and health priorities enacted in the first two years of his administration.

The legislation is a compromise between Republicans, who aimed for larger spending reductions, and the White House, which wanted a clean debt limit bill with no spending cuts. House Republicans had passed legislation in late April that would have reduced projected budget deficits by nearly $5 trillion over 11 years. The Congressional Budget Office (CBO) forecasts the bipartisan legislation will reduce deficits by $1.5 trillion over 11 years, assuming that Congress follows through on nonbinding spending caps after 2025.

This Client Alert includes a high-level summary of some of the Act’s key provisions.

• Discretionary funding caps for FY 2024 and FY 2025; spending limits for FY2026 through FY2029.Defense and nondefense discretionary spending are subject to caps that will be enforced by sequestration. Under the caps, budget authority for defense programs will increase from its level of $858 billion in FY2023 to $886 billion in FY2024 and $895 billion in FY2025. Budget authority for nondefense discretionary programs will decrease from $767 billion in FY2023 to $704 billion in FY2024 and $711 billion in FY2025. The caps will allow exceptions for certain discretionary programs such as disaster relief; the caps also allow new exceptions for certain programs under the 21st Century Cures Act and the Harbor Maintenance Trust Fund. This sequestration stipulation will result in spending cuts of 1% in each fiscal year if Congress does not pass the 12 appropriations bills this year and next year by December 31. For FY2026 through FY2029, a single limit on overall discretionary spending in each year would be applied via the Congressional budget process. Enforcement of the budget caps for FY2024 and FY2025 varies based on their legislative origins and will be enforced through sequestration, or an automatic, across-the-board reduction of spending if lawmakers enact discretionary spending levels that exceed the caps. Enforcement of the budget limits for FY26 through FY2029 will not occur through sequestration, but rather through the ability to raise points of order during the consideration of the annual appropriations process.
• Changes to Supplemental Nutrition Assistance Program (SNAP).Under current law, SNAP imposes certain work requirements on childless recipients ages 18 to 49; the new law expands that range through age 54. Veterans, people experiencing homelessness, and people ages 18 to 24 who were in foster care at age 18 would all be fully exempt from work requirements. These changes to SNAP represent a net increase in spending.
• Rescissions: IRS, COVID-19 Pandemic Funding.The Act rescinds $1.4 billion in funding for IRS “enforcement and related activities,” part of the money that was provided by the Inflation Reduction Act. The Act also repurposes $10 billion in appropriated IRS funding for FY 2024 and another $10 billion for 2025. The legislation also rescinds approximately $27 billion in unobligated funds authorized in response to the coronavirus pandemic from 2020 to 2022.
• Permitting Reform.The Act includes measures aimed at speeding up the permitting process, such as setting deadlines for environmental reviews. It amends the National Environmental Policy Act by requiring a single federal agency to lead environmental reviews for infrastructure projects, and sets a one-year deadline for agencies to issue environmental assessments and a two-year deadline for environmental impact statements. The Act also stipulates that if an agency develops a “categorical exclusion” for a type of project another agency could use it instead of going through a separate review. Other provisions in the bill make energy storage projects eligible for permitting under the Fixing America’s Surface Transportation Act (the FAST Act). The Act also allows the partly built $6.6 billion Mountain Valley natural gas pipeline to move forward in West Virginia; barring legal challenges to permits for the project.
• PAYGO for Rulemaking. The Act codifies a “pay-as-you-go” (PAYGO) rule for executive branch rulemaking, requiring federal agencies to offset any policy action that increases direct spending by more than $100M per year with another policy to cut spending at least as much. However, the Director of the White House Office of Management and Budget (OMB) has authority to waive the requirement and decisions will not be subject to judicial review.

Conclusion. With the agreement secured and the default crisis averted, it’s important to consider the overall impact of the debt ceiling agreement. The most significant impact of the Act on the budget results from caps on discretionary funding. Of the projected $1.5 trillion in reductions over the next decade, discretionary outlays account for $1.3 trillion. Net mandatory spending would decrease by $10 billion, and net revenues would reduce by $2 billion between 2023–2033. The policy changes will have a more enduring impact and also set the stage for additional investments in areas such as permitting reform and other infrastructure projects. However, the biggest potential impact of this agreement may be that with pressure on Congress to enact the complete set of budget appropriations bills by the end of the calendar year there could be more legislative vehicles that move through Congress than anticipated. This could create more opportunities to advance policy initiatives than is typical with the large end-of-the year funding bills we have seen of late.