The Biden-McCarthy Debt-Ceiling Fight in Historical Perspective

House Speaker Kevin McCarthy and his Republican colleagues are in favor of reducing federal spending before negotiating an increase in the debt ceiling. They propose to cap discretionary spending in fiscal year 2024 at the level of fiscal year 2022, which would cut discretionary spending by $133 billion. Republicans widely support that the spending cuts should come from non-defense programs. On the other hand, President Biden and his Democratic colleagues want negotiations on federal spending before raising the debt ceiling. In the current negotiations, Democrats find Republicans’ proposal of a considerable reduction in discretionary spending unacceptable, especially since the proposed cuts are limited to non-defense programs. As both sides continue to strive for a resolution, it remains to be seen who will emerge victorious in the Biden-McCarthy debt ceiling battle.

The problem with these budget negotiations is that there is no effective budget constraint. The fight is not about the budget but rather a spending program. Congress must pass a budget resolution before approving expenditures. However, continuing resolutions that enable spending even in the absence of a budget resolution are frequently passed. Moreover, separate committees propose budgets for twelve federal programs which become the foundation of the negotiation over an Omnibus Bill. Nonetheless, there is no single legislative body to oversee the complete budget, and there is no effective control on the growth in federal spending.

Theoretically, the debt-ceiling sets a limit on the amount Congress can borrow and spend. In practice, Congress routinely raises the debt ceiling to accommodate its existing borrowing and spending, and it is expected to do so in the current negotiation as well.

Republicans and Democrats reached a compromise in 2011 to raise the debt ceiling in exchange for spending constraints over a decade, resulting in the Budget Control Act (BCA). The BCA established the Joint Select Committee on Deficit Reduction and laid down a target of reducing deficits by at least $1.2 trillion over ten years. The Joint Committee could not agree on spending cuts but suggested sequestration or across-the-board spending reductions as an alternative mechanism for deficit reduction. BCA imposed discretionary spending caps based on the ‘parity principle,’ requiring equal cuts in defense and non-defense spending. Although funds could be shifted between government programs, BCA prohibited the reallocation of funds between defense and non-defense programs.

After ten years, these spending caps were subject to increase and circumventing, which eventually led to the expiration of BCA on 2022. Congress abandoned the ‘parity principle’ in the FY 2023 Omnibus Bill. Defense funding increased by 9.7% while non-defense funding increased by 7.9%. The bill added $47 billion of supplemental funding for Ukraine and $38 billion for natural disaster and other departments. Total non-emergency funding increased by 9% compared to the 2022 funding. Over 75% of the increased funding was allocated to national defense. Without the BCA spending caps, the overall federal spending accelerates, and higher proportion of the increased spending go to national defense.

With no fiscal rule imposing a budget constraint, the most probable outcome of the 2024 budget negotiations is business as usual. Republican legislators will compromise with the Democrats to allow higher spending levels. Since abandoning the ‘parity principle,’ interest groups supporting higher defense spending have been more successful than those supporting non-defense spending, and this trend is likely to continue next year as well.

The Congressional Budget Office projects that the national debt will continue to increase and exceed by 200% of national income by mid-century if the current law remains in place. The CBO also concluded that the federal spending and debt under the existing law are not sustainable. Increased debt level accompanies a sharp increase in interest rates, which will exacerbate the debt burden. The country is at a high risk of debt default long before the debt burden surpasses 200% of national income.

In response to this risk, House Budget Chairman Jodey Arrington introduced HCR 24, which proposes an Inflation-fighting Fiscal Responsibility Amendment that would establish a constitutional path for the state to draft and the people to ratify. If approved by a simple majority vote in Congress, the resolution would set a date and place for a Convention for proposing Amendments and require a vote of 3/4 of the states that support any proposed amendments. The Federal Fiscal Sustainability Foundation is requesting that state attorneys general consider a mandamus case to force Congress to fulfill its duty as described in HCR 24 and put the country on track towards sustainable fiscal solvency.

Barry W. Poulson and David Biddulph are Co-founders of the Federal Fiscal Sustainability Foundation