A Federal Agency Budget Freeze Seems Likely at a Minimum, as Debt Deal Remains Elusive

Most non-defense federal agencies appear headed for at least a spending freeze next fiscal year—if not an outright cut—as President Biden has offered to back down from his proposed spending increases in exchange for an increase to the government’s debt ceiling. 

House Republicans, who are spearheading negotiations with the White House to avoid a debt default that could occur as soon as June 1, have rejected that proposal, holding out for cuts compared to current spending levels. The two sides have been locked in marathon negotiations for the last week, agreeing to some cost cutting measures but remaining far from an overall agreement. 

“We’re not there yet,” House Speaker Kevin McCarthy, R-Calif., told reporters at the Capitol on Tuesday. “We are not putting anything on the floor that doesn't spend less than we spent this year.” 

House Republicans last month passed a bill that would pair a 10-month debt limit increase with slashing discretionary funding for domestic agencies by more than 20% compared to current appropriations, while keeping spending caps in place for a decade. Biden and congressional Democrats previously refused to negotiate and demanded a “clean” debt limit increase without conditions, but have since offered proposals that have included freezing discretionary spending at fiscal 2023 levels. House Minority Leader Hakeem Jeffries, D-N.Y., confirmed the offer and derided Republicans for rejecting something he called “inherently reasonable.” 

Asked what concessions Republicans were willing to make to meet Democrats, McCarthy said agreeing to raise the borrowing limit was the lone such compromise. He did not elaborate on what level of spending reduction below current levels he would accept and negotiators said after an hours-long discussion Tuesday that the fiscal 2024 spending level remained the most significant disagreement preventing a deal. The White House is pushing to limit spending caps to just two years—which the White House said would reduce the national debt by $1 trillion over the next decade—while McCarthy said he is pushing for longer-term restraints. 

Rep. Garrett Graves, R-La., who McCarthy has tapped to lead negotiations with White House staff, said Tuesday evening after talks appeared to end for the day that Republicans were set on "enforcing a paradigm shift" in the nation's spending trajectory. He reiterated the discretionary funding levels were the biggest sticking point in negotiations.

"We still have huge gaps, especially on the funding issues, disagreements on spending and that this administration thinks they can continue to take the same trajectory," Graves said. He added any deal had to amount to more than, "One year we did something and pat ourselves on the back." 

Even a small cut at the top-line level to discretionary spending would likely cause significant pain to most agencies, given the large agencies that will be exempted. 

“We're clearly not going to cut defense below the president's level,” Rep. Tom Cole, R-Okla., said Tuesday. “We'd like to go above it. We’re clearly not going to cut veterans. We’re very probably going to do more on [the] Homeland [Security Department].” 

Rep. Rosa DeLauro, D-Conn., the top Democrat on the House Appropriations Committee, said her caucus would need to see details on where cuts are taking place between defense and non-defense spending before it was ready to “sign on the dotted line.” She declined to say whether Democrats would agree to spending levels below fiscal 2023 levels, calling it speculative. 

In addition to discretionary spending levels, negotiators are looking for other ways to reduce federal deficits. Both sides had signaled a willingness to claw back unspent COVID-19 pandemic aid and institute some new restrictions on qualifications for certain federal programs that assist low-income individuals and families, though the exact parameters of those changes have remained an enduring sticking point. They are also looking to ease the permitting process for energy projects. 

While negotiators indicated they remain far from reaching a deal, they said the momentum can swing quickly. McCarthy has committed to giving House members at least 72 hours after a deal is reached and a bill is introduced before holding a vote, which would then send the measure to the Senate before getting it to Biden’s desk for his signature before the potential June 1 deadline. 

“There’s always a possibility,” McCarthy said of reaching a deal Tuesday. “I’m a very optimistic person.” 

White House Press Secretary Karine Jean-Pierre echoed that suggestion. 

“If everyone is working in good faith and recognizes that neither side is going to get exactly what they want, we’ll get it done,” Jean-Pierre said. “This could be done today, actually.” 

Cole stressed negotiators are not out of the woods and an unprecedented default remains possible. 

“I think the day you're not worried is the day you're complacent, and if you’re being complacent then you lose,” Cole said. “So I am worried.” He added his biggest concern is Democrats being “cavalier.” 

Rep. Patrick McHenry, R-N.C., another negotiator tapped by McCarthy, said Tuesday evening there were no immediate plans to again meet with White House officials, but both sides were updating their respective teams. 

“They have their work to do and we have our work to do,” McHenry said.

Treasury Department Secretary Janet Yellen said earlier this month the government could default on its debts as soon as June 1, though she noted the actual deadline could be “a number of weeks later.” The Bipartisan Policy Center, a think tank that focuses on budget and debt ceiling issues, has estimated that the “X date” on which the government will no longer have enough cash to meet its obligations could fall between early June 2 and June 13. 

While economists and lawmakers have speculated about a range of outcomes if an unprecedented default were to occur, most have agreed the most likely scenario would require the Treasury to delay all government payments until it had enough money available to meet the demands of a given day. That would likely require federal employees to either face furloughs or work with only the promise of back pay once the situation was resolved. Agency payments to beneficiaries, states, grantees, contractors and, potentially, their own employees, would be disrupted. Treasury could pick and choose which payments to make each day, though officials have said that would present legal and operational challenges.