House Speaker Kevin McCarthy (R-CA) and his Republican colleagues refuse to negotiate an increase in the debt ceiling without a reduction in federal spending. They propose capping discretionary spending in 2024 back to 2022 levels. This would require a reduction in discretionary spending of $133 billion. There is broad support within the Republican caucus that the spending cuts should be in non-defense programs. President Biden and his Democratic colleagues say that raising the debt ceiling automatically without negotiations over federal spending is “not negotiable.” For Democrats, the idea that discretionary spending should be reduced significantly and that the spending cuts should only be in non-defense programs is a non-starter in the current budget negotiations. Who will win the Biden-McCarthy debt ceiling battle?

The fatal flaw in these budget negotiations is that there is no effective budget constraint. What Republicans and Democrats are really fighting over is not a budget, but rather a spending program. Congress is required by law to enact a budget resolution prior to approving expenditures, but Congress passes continuing resolutions that allow it to spend funds even in the absence of a budget resolution. Separate committees propose budgets for 12 different federal programs that is then the basis for negotiation over an Omnibus bill. There is no single legislative body responsible for the entire budget, and no effective constraint on the growth in federal spending. 

Theoretically, the debt limit imposes a cap on the amount that Congress can borrow and spend. But Congress routinely increases the debt limit to accommodate the borrowing and spending that has already occurred, and they will likely do so in the current negotiations as well.

A budget constraint was imposed in the 2011 Budget Control Act (BCA), which was the outcome of a compromise between Republicans and Democrats to increase the debt ceiling that year in exchange for spending constraints over the following decade. The debt ceiling was increased by $1.2 trillion, contingent on Congress reducing spending by an equal amount over the decade.

The BCA created the Joint Select Committee on Deficit Reduction, charged with coming up with a plan to reduce deficits by at least $1.2 trillion over 10 years. The Joint Committee failed to agree on spending reductions, but provided a fallback mechanism to reduce deficits, sequestration: across the board reductions in spending. The reductions in spending were to be achieved by imposing discretionary spending caps and automatic reductions in mandatory spending. The spending caps imposed by BCA were based on the “parity principle” requiring equal reduction in defense and non-defense spending. Funds could be shifted between government programs, but BCA prohibited the reallocation of funds between defense and non-defense programs.

Over the past decade, five difference pieces of legislation have altered the BCA because Congress could not live with the fiscal constraints imposed by BCA. Each of these five pieces of legislation increased the spending caps and postponed or modified the sequestration mandated by the BCA. Legislation also suspended the debt limit, which means that during the suspension periods there was not an effective constraint on debt. In 2022 Congress allowed the most important provisions of the BCA, statutory caps on discretionary spending, to expire. So, for the foreseeable future there is no longer an effective statutory constraint on the growth in federal expenditures.

While the BCA spending caps have had little impact on total spending in the long term, they have significantly impacted the composition of that spending. The bipartisan Budget Act of 2015 provided funding for the military’s Overseas Contingency Operations (OCO), funding that was not subject to BCA spending caps. Over the past decade, funding for (OCO) increased significantly relative to the base defense budget. In fact, a significant share of OCO appropriations was reallocated to the base budget. The explanation for this accounting gimmick is that base budgets were subject to BCA spending caps, while funding for OCO was not, so it is not surprising that funding for OCO activities and emergencies increased more rapidly than base budget funding. The fact that some of that funding leaked into the base budgets suggests that this accounting gimmick provided an end-run around the BCA spending caps.

After a decade in which the BCA spending caps have been increased and circumvented to accommodate higher levels of spending, it is not surprising that the spending caps were allowed to expire in 2022. With expiration of the BCA spending caps in 2022, OCO expenditures were included in the base budget because it was no longer necessary to shift this spending off budget to circumvent the BCA caps.

In the 2023 Omnibus bill, Congress also abandoned the “parity principle.” Total defense funding increased 9.7 percent compared to a 7.9 percent increase in non-defense funding. The bill also provided $47 billion in supplemental funding for Ukraine and $38 billion for natural disaster and other expenditures. Total non-emergency funding increased 9 percent over 2022 funding levels. In fact, more than 75 percent of the increased funding is for defense and less than 25 percent is for non-defense programs. With the expiration of BCA spending caps, total federal spending is accelerating, and a greater share of the increased spending is allocated to national defense. 

In the absence of a fiscal rule imposing a budget constraint, the most likely outcome of budget negotiations for 2024 is business as usual. Republican legislators will compromise with their Democratic colleagues to sanction higher levels of spending. Since abandoning the “parity principle,” special interest groups lobbying for higher defense spending have been more successful than the interest groups supporting non-defense spending, and that is likely to continue in the years to come.

The Congressional Budget Office (CBO)projects that, under current law, debt will continue to increase and by mid-century it will exceed 200 percent of national income. CBO also concludes that the increase in federal spending and debt under current law is not sustainable. Higher debt levels will be accompanied by sharp increases in interest rates, further increasing the debt burden.  Long before the debt burden grows to 200 percent of national income, the nation will be exposed to a high risk of debt default and the economic calamity that will likely ensue.

Barry Paulson (think@heartland.org) is a policy advisor with The Heartland Institute.

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