Debt Limit Deal Would Save Feds' Paychecks, But Freeze Agency Spending

This story was updated at 4:30 p.m. on May 30. 

An agreement between the White House and congressional Republicans would bring a spending freeze to federal agencies next fiscal year in exchange for punting debt ceiling decisions into 2025, averting a crisis for government operations and ensuring federal employees continue to receive their paychecks on time. 

With Treasury Department Secretary Janet Yellen warning lawmakers a catastrophic debt default would likely occur June 5 absent congressional action, President Biden and House Speaker Kevin McCarthy, R-Calif., struck the deal to suspend the borrowing limit through Jan. 1, 2025. The agreement would require some belt-tightening that may remind federal employees of the spending caps-era that followed the 2011 Budget Control Act, but the bill avoided the more drastic cuts Republicans had sought. The agreement, dubbed the 2023 Fiscal Responsibility Act, came together after weeks of tense negotiations that followed the White House initially suggesting it would not discuss any outcome other than a “clean” debt ceiling hike. 

The measure nominally reduces top-line discretionary spending at non-defense agencies for fiscal 2024, but includes offsets elsewhere that can be applied to those accounts and will ultimately keep funding essentially frozen at fiscal 2023 levels. The bill carves out the departments of Defense and Veterans Affairs, where funding would meet President Biden’s request. It would cap spending at 1% growth for fiscal 2025 for both defense and non-defense agencies. The agreement includes spending caps for the subsequent four fiscal years, but they are advisory in nature and Congress could easily ignore them. 

House Republicans who negotiated the bill with McCarthy said the deal “changed the trajectory” of federal spending, though they conceded the measure fell far short of the proposal Republicans passed in April. 

One of the offsets in the deal would claw back spending some of the $80 billion cash infusion Congress provided to the Internal Revenue Service as part of the Inflation Reduction Act. The measure specifically spells out $1.4 billion in rescissions, but White House officials told reporters there is an additional agreement to rescind another $10 billion in both fiscal years 2024 and 2025. The reduction is not expected to change any immediate plans for IRS, which is looking to hire 30,000 employees over the next two years to boost enforcement and customer service, as the agency could spend the remaining $60 billion in Inflation Reduction Act funds whenever it sees fit. IRS was expecting to go to Congress to ask for more funds after the 10-year window the Inflation Reduction Act provided, officials said, and this provision simply moves that timeline forward on the back end. 

“We don't think it'll fundamentally change what the IRS does over the course of the next few years,” a White House official said. 

The deal also seeks to limit the threat of a shutdown for the next two years. If by Jan. 1, 2024, Congress has not passed all 12 annual appropriations bills, a continuing resolution would kick in that cuts discretionary spending for defense and non-defense agencies by 1% until such bills are passed. The provision is intended to incentivize lawmakers to pass line-by-line funding bills, as both Democrats and Republicans want to avoid a cut to their key priorities. The same contingency would be in effect for 2025. Current funding is set to expire Sept. 30, meaning a fall shutdown could still occur. 

“That's an important incentive to pass bills because there are a bunch of folks in Congress who won't want to see defense go below that 2023 level,” a White House official said. 

Republicans pushed to include another hurdle for federal agencies that requires the Biden administration to offset the cost of regulatory rules it implements. The provision, which sunsets after two years, includes a waiver that allows the Office of Management and Budget to ignore the requirement if doing so is “necessary for effective program delivery.” A White House official called it “a very broad waiver authority.” 

The bill would claw back $30 billion in unspent COVID-19 aid money and make some reforms to the National Environmental Policy Act to hasten the federal permitting process for energy projects. 

The agreement drew criticism from both the most progressive and conservative members of Congress. On the right, lawmakers said the spending freeze, as well as the changes to extend work requirements for the Temporary Assistance for Needy Families and Supplemental Nutrition Assistance Program, were insufficient. On the left, members noted the fiscal 2024 non-defense spending freeze and small increase in 2025 represented an effective cut in real dollars when accounting for inflation. The deal falls well short of the 7.3% increase to non-defense discretionary spending Biden had sought and eschews the parity in funding increases for the defense and non-defesne sides of the ledger, as Democrats typically demand. 

“In a divided government, we're not going to get the kinds of [non-defense discretionary] increases that we would hope to get,” a White House official said. “And so, this will continue to be a priority for us going forward, going into the rest of the term and hopefully in the president's second term.”

McCarthy similarly acknowledged that some in his caucus would be disappointed, but the deal represented the best compromise he could achieve. 

“It doesn’t get everything everybody wanted, but in a divided government that’s where we end up,” McCarthy said. 

The House Rules Committee is set to move the agreement on Tuesday and it is set to be considered on the floor of the chamber on Wednesday. It will then move to the Senate, which will then have to move on an expedited timeline to get it to the president’s desk by June 5. McCarthy expressed confidence he can advance the bill through the House, though some lawmakers have threatened to use various legislative procedures to upend the process. 

Members of the conservative House Freedom Caucus derided the bill during a press conference Tuesday, with Rep. Chip Roy, R-Texas, saying, “Not one Republican should vote for this deal.” They pledged to continue to fight against it. 

“I am focused on defeating this bill,” said Rep. Scott Perry, R-Pa. 

House Minority Leader Hakeem Jeffries, D-N.Y., said McCarthy has vowed to deliver "yes" votes from two-thirds of his caucus, or roughly 150 members, and, so long as he fulfills that promise, Democrats will provide the remaining votes necessary for passage. Senate leaders Chuck Schumer, D-N.Y., and Mitch McConnell, R-Ky., have both endorsed the bill and called for their colleagues to support its quick approval, though Sen. Mike Lee, R-Utah, has threatened to use legislative procedures to slow down the process.