Update 697 — Season of Dodging Bullets
Democrats Avert Default, Deficit Disasters
We open by noting this morning’s jobs report for May — a much stronger than expected 339,000 jobs were added to the economy while unemployment rose to 3.7 percent, from 3.4 in April. This signal of the labor market’s continued resilience comes two weeks before the Fed decides whether to pause its series of interest rate hikes for the first time in over a year.
In bigger news, the Senate on Thursday passed the Fiscal Responsibility Act of 2023. The Biden-McCarthy authored debt deal cleared the House on Wednesday. It suspends the debt limit through 2025 and cuts nondefense spending, among other provisions (see details below). President Biden will sign it as soon as he receives it, and will address the nation at 7 PM ET tonight, live here.
The X-date has exited but the fiscal drama will subside this summer, to resume in September, though — as a result of the debt limit deal — with dynamics less ripe for hostage-taking, marginally more for mutual agreement when FY 24 is taken up.
A good weekend to all…
Dana
Late last night, the Senate voted 63-36 in favor of the Fiscal Responsibility Act of 2023, a bipartisan deal to suspend the debt limit through 2025 and cut nondefense spending, among other provisions. President Biden promised to sign the bill, which cleared the House on Wednesday, as soon as possible.
The passage of the bipartisan deal follows weeks of intense negotiations between House Republicans and the White House. Although it was Speaker Kevin McCarthy and Republicans who initially demanded a series of budget cuts in exchange for raising the debt ceiling, the bill ultimately emerged with more Democratic than Republican support in both chambers. Only 17 Senate Republicans voted in favor, which Majority Leader Chuck Schumer brought to the floor after reaching agreements on amendment votes and a supplemental defense funding bill. In the House, where the bill was approved 314-117, several far-right Republicans refused to support the bill on the grounds that it did not go far enough.
The bill’s passage means that the United States will avoid default until early 2025. But this comes at a significant cost. The bill makes real cuts to government spending, put older adults at risk of losing food assistance, and target the ability of the IRS to carry out enforcement activities against wealthy tax cheats.
The Fiscal Responsibility Act of 2023:
- Imposes caps on discretionary funding
- Rescinds unspent Covid relief funds
- Rescinds some IRS funding from the Inflation Reduction Act
- Modifies work requirements for SNAP and TANF
- Extends the debt limit through January 1, 2025
- Ends the student loan repayment pause
- Requires the administration to follow pay-as-you-go rules
- Makes appropriations for the Commerce Department and veterans’ healthcare
- Makes permitting reforms and expedites the Mountain Valley Pipeline
Spending Caps and the IRS
The bill establishes caps on discretionary funding for Fiscal Years 2024 and 2025. The deal is structured in such a way that both sides can claim victory. Republicans are able to say that they cut non-defense discretionary funding for FY24 back to FY22 levels. The White House is able to claim that they secured funding at roughly FY23 levels thanks to an agreement to reallocate IRS funding to other nondefense programs. For FY25, nondefense discretionary spending growth is capped at one percent. The bill also sets limits on funding through FY29 that are not enforceable through sequestration. Defense spending and veterans’ care will increase to the levels proposed in President Biden’s FY24 budget proposal. Later this year, a defense supplemental spending bill, mostly for Ukraine, will very likely be enacted overriding the spending caps.
White House negotiators were able to stave off the draconian budget cuts that Republicans initially called for, but bear in mind, flat funding and budget increases that don’t keep pace with inflation are cuts. As agencies’ costs rise, they need funding increases to simply maintain their current operations. The coming budget caps will put additional strain on agencies’ operations.
The bill also includes a mechanism to establish temporary caps on funding if all twelve appropriations bills haven’t been passed by January 1 of either 2024 or 2025. The temporary caps would be equal to budget authority for the prior fiscal year minus one percent. Defense and nondefense are held separately for this purpose. Since defense and veterans spending received increases, the temporary caps going into effect would hit defense spending much harder.
Base Discretionary Funding Under New Budget Caps (Billions of Dollars)
| FY23 Enacted | FY24 | FY25 | |
| Defense | 858.3 | 886.3 | 895.2 |
| Nondefense | 767.2 | 703.7 | 710.7 |
| Total | 1625.5 | 1590.0 | 1605.9 |
Source: Congressional Budget Office
The IRS
Over two years, roughly $20 billion of IRS funding from the Inflation Reduction Act (IRA) will be reallocated to other nondefense programs. On the positive side, IRS officials have said that they will be able to continue their efforts to improve customer service and expand enforcement activities. The IRA funding was intended to be spread out over eight years, meaning that the IRS can continue its work in the near term while that funding prevents deeper cuts to other programs and services.
The IRS had already indicated before this deal that without increases in annual appropriations that at least kept pace with inflation, the agency would need to return to Congress for additional funding to carry out the tasks set out in the IRA. Without adequate increases, the agency will need to use IRA funds to help maintain steady-state operations. Now, not only is the funding from the IRA itself being pulled back, but annual appropriations will not be keeping pace with inflation for at least the next two years, meaning the IRS will likely need another round of funding sooner than previously thought.
The trade-off will actually add to deficits over time. The $80 billion provided to the IRS in the IRA would have generated an estimated $120 billion increase in revenues by providing the IRS with the resources it needs to pursue enforcement activities against wealthy tax cheats. Per CBO estimates, rescinding $1.4 billion, as stated in the Fiscal Responsibility Act will cut revenues by $2.3 billion over ten years, resulting in a $900 million increase in the deficit. The CBO estimates project that $21.4 billion in cuts to the IRS will result in $40.4 billion in lost revenue, increasing the deficit by $19 billion.
Changes to SNAP
The Fiscal Responsibility Act expands three-month time limits for SNAP recipients who are not able to document completion of work requirements to able-bodied adults without dependents aged 50 to 52 beginning in FY24. Able-bodied adults without dependents up to age 54 would be subject to the requirements beginning in FY2025. The bill also reduces the number of monthly discretionary exemptions that states can use and bars states from carrying over unused exemptions for more than one year. The Center on Budget and Policy Priorities estimates that these changes put almost 750,000 older adults at risk of losing food assistance.
Exemptions: People experiencing homelessness, veterans, and former foster youth will now be exempt from work requirements. These new exemptions would affect both some adults aged 50-54 who would be newly subject to the reporting requirements and some younger adults who were previously not exempt. CBO estimates that these changes enacted simultaneously will actually increase SNAP enrollment and increase SNAP spending by $2.1 billion over the ten year budget window. The new exemptions are ultimately positive, but obtaining exemptions can be difficult for individuals to navigate, which may limit their effectiveness.
Both the new exemptions and the expansion of work requirements to older adults sunset in 2030.
FY24 and Beyond
The general consensus in DC is that this debt limit agreement is pretty bad, but not nearly as bad as it could have been. The House-passed Limit, Save, Grow Act, House Republicans’ starting point for debt limit negotiations, would have made far deeper cuts to non-defense spending and made work reporting requirements for assistance programs even more onerous.
Republicans will keep pushing for additional cuts to their favorite targets, like SNAP and the IRS, through other means, including the farm bill and the regular appropriations process. They will also renew their efforts to extend tax breaks from the 2017 Trump tax cuts which would disproportionately benefit the wealthy and corporations. House Ways and Means Chairman Jason Smith is expected to release a tax package by mid-June that would likely renew three expired corporate tax provisions and make permanent a number of individual tax cuts from the 2017 bill that are set to expire in 2025, increasing the deficit by tens or hundreds of billions.
Congressional Republicans’ commitment to extending tax breaks for the wealthy and corporations stands in stark contrast to their stated values around reducing the deficit. This dichotomy, paired with punitive cuts in the compromise bill that will either have a minimal effect or increase deficits depending on the policy, make it clear that the House majority’s goal is not actually fiscal responsibility.