Debt-Ceiling Deal’s Economic Drag Will Be Small

As the U.S. government’s debt was closing in on its statutory limit of $31.4 trillion, President Joe Biden on June 3 signed the Fiscal Responsibility Act (FRA). The law, which contained minimal cuts in federal spending, averted a U.S. default and possible global financial crisis by simply suspending the debt ceiling until Jan. 1, 2025.

Compared to the Congressional Budget Office’s baseline projections, the spending cuts contained in the new law will be small relative to GDP. The potential drag on GDP growth during fiscal years 2024 and 2025 will be on the order of 0.2%. It will be nearly inconsequential thereafter.

The FRA includes measures intended to restrain the growth of future discretionary spending. The most important provisions impose statutory caps on both defense and nondefense discretionary spending for fiscal years 2024 and 2025 that would be enforced through sequestration. If full fiscal-year appropriations are enacted by Jan. 1 of each year, the budget authority for defense would be capped at $886.3 billion in 2024 and $895.2 billion in 2025, for increases of 3.3% and 4.3% over the $858.3 enacted for 2023. The budget authority for nondefense would be capped at $703.7 billion in 2024 and $710.7 billion in 2025, for decreases of 8.3% and 7.4% from the $767.2 enacted for 2023. If total appropriations exceeded the specified caps, sequestration would enforce what amounts to across-the-board reductions as needed to match the totals to the caps.

The FRA sequestration process creates an incentive of sorts for a return to regular order and some semblance of discipline to the budget process for fiscal years 2024 and 2025. If by Jan. 1 of each year, the appropriations process is not complete—i.e., the government is conducting fiscal operations under a continuing resolution—the budget caps are reduced. The budget authority for defense spending would then be capped at $849.8 billion in each year, while the budget authority for nondefense spending would be capped at $736.4 billion.

Beyond fiscal year 2025, the FRA sets budget authority limits by computing a 1% annual increase on the 2025 budget authority. However, the limits are only enforceable by way of the normal “procedures for considering budgetary legislation.” This means they are not enforceable, as they can be modified with such legislation.

The FRA also addresses a grab bag of minor fiscal issues. For example, rescinding unspent COVID-19 relief funds and part of the funds provided to the IRS under the Inflation Reduction Act for enforcement, expanding work requirements for certain welfare programs, and terminating student loan forbearance on Aug. 30.

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