Lawmakers attempting to finish fiscal 2024 appropriations early next year face a new reality laid bare by nonpartisan budget scorekeepers in recent months: automatic cuts in last spring’s debt limit law intended to force final agreement that would disproportionately hit nondefense programs.
It’s the opposite of what most observers expected at the time the deal was inked, when defense was thought to be the bigger victim of a failure to complete this year’s work. The new Congressional Budget Office numbers flip the law’s incentive structure on its head, potentially giving House GOP hard-liners some leverage in the upcoming “topline” negotiations over final appropriations.
Freedom Caucus and aligned members haven’t had any luck unifying their conference around deep cuts to the regular spending caps that President Joe Biden and then-Speaker Kevin McCarthy, R-Calif., negotiated as part of the debt limit law.
But watch this space: There could be risks to that deal’s sidecar agreement purporting to add $54 billion to nondefense accounts on top of regular caps through various accounting maneuvers without technically violating the limits. It’s that extra $54 billion that would enable lawmakers to simply keep nondefense spending even with the prior fiscal year, and a big reason why so many Democrats backed the debt ceiling law.
Rep. Chip Roy, R-Texas, the Freedom Caucus’ policy director, has begun railing at that side deal, which wasn’t written into the statutory text and made public only through media leaks. Speaker Mike Johnson, R-La., voted for the debt ceiling law but he wasn’t a party to the McCarthy-led negotiations that produced the side agreement, and is technically under no obligation to see it through.
Without those adds, if the departments of Veterans Affairs and Homeland Security are exempt from cuts as House Republicans have proposed previously, the rest of the nondefense budget could take a roughly 10 percent hit below current levels. Even if they offset an extra $10 billion with cuts to mandatory IRS enforcement funds, one piece of the side deal that conservatives could conceivably support, cuts could still top 7 percent.
If this sounds harsh and unlikely to get through Congress, consider that GOP conservatives for most of this year pushed for 30 percent cuts to nondefense programs. And Republicans could achieve substantial cuts with a simple full-year continuing resolution, which if enacted would trigger a largely indiscriminate across-the-board “sequester.”
Of course, for House Republicans to unify around anything could be a heavy lift. But if they can show they have the votes, Democrats might be hard-pressed not to negotiate.
Backstop basics
The fail-safe mechanism in the debt limit law was designed to bring both parties to the table to complete all 12 spending bills. Republicans liked it because it would trigger automatic cuts to most discretionary programs, while Democrats sold it as taking a much bigger bite out of defense than domestic and foreign aid accounts.
If all appropriations bills are not enacted by Jan. 1, the law’s statutory caps would reset to fiscal 2023 levels minus 1 percent. Then if all 12 spending bills aren’t completed by April 30, automatic cuts would bring funding extended in a CR at current rates down to those reset caps.
The baseline spending levels were what the CBO scored when the fiscal 2023 omnibus package was enacted in December 2022: $858.4 billion for defense and related programs and $743.9 billion for domestic and foreign aid accounts.
The debt limit law negotiated by Biden and McCarthy set a higher $886.3 billion cap for defense but cut the nondefense ceiling to $703.7 billion — not counting the side deal. The backstop provision resets those caps on Jan. 1 to $849.8 billion for defense and $736.4 billion for nondefense, or fiscal 2023 levels with a 1 percent haircut.
In theory, it looked like the Pentagon and other security-related accounts would take a $36.5 billion hit from the agreed-upon fiscal 2024 topline. Meanwhile nondefense programs would see a nearly $33 billion increase.
This turned out to be a backwards interpretation that assumed the fiscal 2023 levels scored nearly a year ago wouldn’t change. CBO scoring isn’t static, however, and accounting maneuvers available to technically keep costs down back in December 2022 ended up excluded from the calculation of stopgap laws enacted in late September and again last week.
As a result, total budget authority for fiscal 2023 carried over on an annualized basis under the two stopgap laws jumped by $34.5 billion from what was scored last December, almost entirely on the nondefense side which jumped all the way from $743.9 billion to $776.9 billion.
Major contributors to that boost included advance appropriations enacted last year for veterans health care and the Indian Health Service in fiscal 2024 that remain in place under the CR, inflating the totals by a combined $22 billion. There was also a steep decline in insurance premiums for federally backed mortgages used to offset Department of Housing and Urban Development funding, boosting HUD’s score by nearly $8 billion.
The CRs also contain “anomalies” that change certain programs’ funding rates, and they don’t carry over some rescissions of unspent funds, like money taken out of the Energy Department’s Strategic Petroleum Reserve account last December.
As a result, if any programs are left operating under a similar short-term CR by next May, budget authority for nondefense programs would be cut by $40.5 billion, or the difference between the CBO-scored level and the new $736.4 billion cap kicking in on Jan. 1. Defense would take a smaller $10 billion hit.
Sequester formula
It’ll be up to the White House budget office to implement the cuts, and their scoring sometimes differs from CBO’s. Whatever percentage cut they settle on, how the reductions get implemented is governed by a complicated formula first enacted in the 1985 deficit control law.
For defense, the $10 billion would be taken out of all accounts other than military personnel pay and benefits — assuming a presidential decree to keep those accounts whole — including unobligated prior-year balances in Pentagon coffers and any new supplemental funds for Ukraine and Israel. Depending on the size of a supplemental, the defense haircut could work out to roughly 1 percent.
For domestic and foreign aid programs, the $40.5 billion cut would come out of all funding made available for fiscal 2024, but not unobligated balances from previous fiscal years. The VA and Pell Grants to help lower-income students afford college would be spared, while Indian Health Service and community health centers cuts would be capped at 2 percent.
Meanwhile advance funds appropriated in the 2021 infrastructure and gun safety laws, as well as emergency disaster aid and other items added on top of last year’s spending caps, would be subject to cuts. All in, every nonexempt account would take a greater than 5 percent hit starting on April 30, the effect of which would be amplified hitting seven months into the fiscal year.
Full-year CR
Assuming Johnson makes good on his pledge of no more short-term CRs, he’ll go straight to a full-year stopgap measure if there’s no deal on the fully fleshed-out spending bills.
The law’s language on a yearlong CR can be interpreted in different ways, but under one commonly held view, it would turn off the cuts that would otherwise trigger on April 30. Even so, the problems for nondefense could just be starting.
Option 1: Simple extension. If lawmakers resort to a simple extension of the current stopgap law for the rest of the fiscal year, nondefense cuts could top $73 billion since the cap on that category technically drops to $703.7 billion. The sequester would be applied using the same 1985 methodology, resulting in nearly 10 percent cuts that take effect 15 days after enactment.
Under a yearlong stopgap measure, lawmakers would likely remove the extra VA and Indian Health Service appropriations carried over in the short-term CRs, resulting in slimmer but still hefty 7 percent nondefense cuts. Meanwhile Pentagon and security-related accounts wouldn’t face any cuts under a full-year CR since the ceiling for that budget category grows by $28 billion in fiscal 2024 under the debt ceiling law.
An alternative interpretation, which the Office of Management and Budget could theoretically apply, would be that a yearlong stopgap measure enacted early in 2024 is technically a part-year bill, which would keep the fiscal 2023 caps minus 1 percent in place. Defense would still take the 1 percent hit in this interpretation, but nondefense cuts would be scaled back to less than 3 percent.
Option 2: Substantial anomalies. Another scenario is Johnson writes a full-year CR with anomalies that conform to the new spending caps for fiscal 2024 and turn off the across-the-board cuts.
That would allow for 3 percent defense growth in line with the debt deal, and if the VA and DHS are exempt, other nondefense programs could be cut by somewhere between 7 and 10 percent depending on offsets. Programs enacted outside of regular spending bills, like the infrastructure law that’s a key plank of the president’s “Bidenomics” pitch to voters, would be spared, unlike under a traditional sequester.
Johnson has hinted at both potential options. In talking points distributed to the GOP conference last week, Johnson said if Democrats don’t come to the table and “responsibly” negotiate final bills, he’d bring up a full-year CR with “appropriate adjustments to meet our national security priorities.”
And in private comments reported by the Washington Examiner, Johnson told Republicans that without final bills early next year that contain “good conservative wins,” the House would take up “the most painful version of a full-year CR, that will result in large across-the-board non-defense cuts.”
Defense would “come out flat without losing much,” while nondefense would take a roughly 8 percent hit, Johnson reportedly said.
Threading the needle
For this strategy to work, Johnson would need unity in his conference.
If he can’t pass a full-year CR with GOP votes in his chamber — and his margin could potentially shrink to two votes if Rep. George Santos, R-N.Y., is expelled and his Democratic-leaning district elects a Democrat early next year — Johnson’s leverage could dissipate.
House Republicans unifying around any CR is a tall order. Case in point: the stopgap measure McCarthy brought to the floor in September that would cut all nondefense spending outside of the VA and DHS by 30 percent and implement tough border and asylum restrictions. Twenty-one Republicans voted “no” and it was defeated 198-232.
But if House Republicans can unite around Johnson in a way they wouldn’t for McCarthy, Democrats and the White House could have a difficult choice: Accept cuts to nondefense programs or fight for higher spending at the risk of a government shutdown. That’s where it becomes harder to justify a “side deal” that wasn’t actually part of the debt limit bill lawmakers voted for, and which the current speaker wasn’t a party to.
But Democrats can rightly argue that the only spending bills with bipartisan support to date are the dozen that the Senate Appropriations Committee reported over the summer. Not only do those bills contain the side deal’s $54 billion — they threw in an extra $14 billion in emergency funds for good measure.
And with 60 Senate votes needed to get anything to Biden’s desk, that could put Johnson in the difficult position of having to go back to his unruly conference empty-handed.
Paul M. Krawzak contributed to this report.
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