House Speaker Kevin McCarthy and President Joe Biden brokered a two-year agreement to suspend the debt ceiling, but it needs quick congressional approval before the federal government runs out of money.

The deal would suspend the debt limit until Jan. 1, 2025, at which point the Treasury Department would reset the limit at whatever amount the government’s spending would be then. The deal also would come just days before June 5, the date when the federal government wouldn’t be able to pay its bills without an increase in or suspension of the nation’s borrowing cap, Treasury has said.

The House is expected to vote tonight on the agreement and, if it passes, the bill, called the Fiscal Responsibility Act, would then move to the Senate.

We’ll explain the main provisions of the bill that would cut, and increase, federal spending.

The legislation is a compromise between Republicans, who wanted larger spending reductions, and the White House, which wanted no spending cuts in a debt limit bill. House Republicans had passed legislation in late April that would have reduced projected budget deficits by $4.8 trillion over 11 years, according to the nonpartisan Congressional Budget Office. The bipartisan deal would reduce deficits by $1.5 trillion over 11 years, but that also assumes that Congress follows through on nonbinding spending caps after 2025, CBO said.

ProposalImpact on Deficit, 2023-2033IRS funding cut+$900 millionDiscretionary funding caps*-$1.3 trillionSNAP and TANF work requirements+$2.1 billionRescind unused COVID-19 funds-$11 billionCommerce department funding+$100 millionInterest on public debt-$188 billionTotal impact on deficit-$1.5 trillionSource: CBO.
* CBO assumes the proposed caps will be adhered to over 10 years. However, there are mandatory caps for only two years; caps in the other years are nonbinding and subject to the congressional appropriations process.

The Penn Wharton Budget Model estimated that the legislation would reduce federal spending, not including interest spending, by about $1.3 trillion over 10 years. But the reduction could be $234 billion or as high as $1.8 trillion, depending on whether Congress enforces discretionary spending caps in the last eight years of that budget window.

Discretionary Funding Caps

The legislation would impose limits on certain defense and nondefense discretionary spending — which is the funding Congress appropriates each year for federal agencies and programs. (Emphasis is ours. More on that later.)

Under the bill, there would be a $1.59 trillion discretionary spending cap in fiscal year 2024 — $886 billion for defense and $704 billion for nondefense. That would represent an overall cut of $12 billion, or about 1%, compared with the current budget, according to a House Budget Committee summary. Defense spending would increase $28 billion, or 3.3%, while nondefense spending would be cut by $40 billion, or 5.4%, the committee summary said.

The overall cap would rise to $1.606 trillion in fiscal year 2025 — $895 billion for defense and $711 billion for nondefense — for an overall increase of 1% compared with FY2024.

However, as the CBO explained, not all discretionary spending would be subject to the funding limits. For example, “funding designated as an emergency requirement or for overseas contingency operations would not be constrained, and certain other funding would not be subject to the caps,” including funding for the 21st Century Cures Act and the Harbor Maintenance Trust Fund. (The term “overseas contingency operations” refers to a defense budget line item.)

After factoring in those and other adjustments, CBO said it “projects that total discretionary funding under the bill would amount to $1.795 trillion in 2024 and $1.818 trillion in 2025.” For fiscal year 2024, that would be a total reduction of $31.2 billion in budget authority compared with this year. (See table 3.)

“It keeps nondefense spending roughly flat with the 2023 levels in 2024, when you factor in agreed-upon appropriations adjustments,” a White House official said in a May 28 background briefing on the agreement. “In 2025, it increases the nondefense spending levels and the defense spending levels by 1%.”

If Congress does not pass the 12 appropriation bills this year and next year by Dec. 31, then discretionary spending for defense and nondefense would be cut by 1% in each fiscal year, the House summary said.

After 2025, the legislation sets nonbinding limits that would be subject to the regular appropriations process. The White House official at the background briefing said “beyond 2025, there are no budget caps, only nonenforceable appropriations targets that were referenced in the legislation.”

IRS Funding Cuts

The bill would rescind $1.4 billion in funding for IRS “enforcement and related activities,” CBO said, part of the money that was provided by the Inflation Reduction Act, a Democratic bill that passed with zero Republican votes and became law in August.

Republicans have repeatedly objected to funding to increase tax compliance enforcement efforts, misleadingly claiming that the legislation would fund “87,000 IRS agents” who would come after the “middle class.” That’s the number of employees the IRS could hire with the Inflation Reduction Act funding, which altogether totaled $79.6 billion over 10 years. But the Treasury Department said most of the hires would be in customer service or to replace retiring or departing workers. And the tax enforcement hires would focus on high-income earners, the IRS commissioner said.

Cutting the $1.4 billion for enforcement doesn’t save the federal government money – less enforcement means a drop in revenue collected of $2.3 billion, CBO said. So the move would increase the deficit by a net $900 million over the 2023-2033 period.

The debt ceiling agreement also would repurpose $10 billion in appropriated IRS funding for fiscal 2024 and another $10 billion for 2025, according to White House officials. In the May 28 press call, the officials said the IRS might need to ask for more funding six or so years down the road, but “we don’t think it’ll fundamentally change what the IRS does over the course of the next few years.”

SNAP Work Requirements

The proposal would increase the age limit for work requirements for the Supplemental Nutrition Assistance Program, known as food stamps, but would exempt other groups from such requirements. Altogether, the changes would increase federal spending by $2.1 billion through 2033, CBO said.

House Speaker Kevin McCarthy walks to the House Chambers at the Capitol on May 30. Photo by Kevin Dietsch/Getty Images.

Under SNAP, able-bodied adults age 18 to 49 without dependent children living with them must either work or participate in a training program for at least 80 hours per month in order to get benefits for more than three months in a three-year period. The debt limit agreement raises that age limit to 52 in fiscal 2024 and to 54 the following year, and it reduces the number of exemptions states can issue for these work requirements.

But other groups won’t be subject to work requirements under the agreement, including veterans and homeless people, and, up until age 24, those who were in foster care at age 18. The work requirement adjustments, however, sunset on Oct. 1, 2030.

White House officials said the president insisted on an expiration date for the changes, “which will give Congress an opportunity to reevaluate them.”

CBO estimated that when the changes are fully in effect, starting in 2025, about 78,000 more people would get SNAP benefits per month on average. (There were 42.5 million people getting benefits as of February.)

TANF Work Requirements

Temporary Assistance for Needy Families is a block grant program that annually provides about $16.5 billion to states for their cash assistance programs for low-income families. TANF was created by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, replacing the Aid to Families with Dependent Children program, which was better known as “welfare.”

The so-called welfare-to-work law — signed by Democratic President Bill Clinton in 1996 — was controversial because it imposed time limits on cash assistance and required nearly all TANF recipients to work or engage in work-related activities in order to continue receiving funds.

Under the law, “a state must have 50% of all families and 90% of two-parent families receiving assistance engaged in either work or activities,” as explained in a recent report by the Congressional Research Service. Those percentages are lower for states that reduced the number of families on assistance by 50% or more since 2005, according to the CRS report.

The debt ceiling legislation would tweak the performance standards that states must meet: The benchmark year for reducing TANF caseloads would be changed from 2005 to 2015, and families receiving less than $35 per month would not count toward satisfying the state’s work standard.

The CBO estimated that the provisions “would reduce state grants slightly,” saving only $5 million over 11 years.

Rescind Unused COVID-19 Funds

The bill’s section on rescinding unobligated funds also would reclaim some of the money that was authorized in response to the coronavirus pandemic from 2020 to 2022. The federal public health emergency for COVID-19 ended May 11.

CBO estimated this part of the bill would shrink related budget authority by an estimated $27.1 billion, while reducing federal spending by $11 billion over the 2023–2033 period, compared with CBO’s baseline projections. “A majority of the reductions would come from the Public Health and Social Service Emergency Fund and from certain infrastructure and disaster relief programs,” CBO said.

Commerce Department Funding

The bill would appropriate $22 billion for the Department of Commerce Nonrecurring Expenses Fund, which is used to improve the department’s information and business technology systems and infrastructure.

The money funds department activities in fiscal years 2024 and 2025, and increases spending by an estimated $100 million over 10 years, CBO said.

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