Who really won the Debt Ceiling Compromise?
Economic Policy Brief #54 | By: Arvind Salem | June 14, 2023
Photo taken from: marketwatch.com
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On June 3, 2023, just two days before a disastrous default and government shutdown, President Joe Biden signed the Fiscal Responsibility Act of 2023 to suspend the debt ceiling until 2025. The act was a result of months of political maneuvering and negotiations as Republicans attempted to use their control of the House of Representatives and the threat of default as leverage to negotiate a compromise with Democrats, who control both the presidency and the Senate. Predictably, the deal’s provisions represent a middle-ground on many issues, with key wins and losses for both sides.
Going into the negotiations, the Republican party was keen on using their leverage to negotiate spending cuts, while Democrats wanted to pass a clean debt ceiling increase and have these policy discussions another time. However, it soon became clear that to avoid default a compromise would be necessary. Examining the key provisions of the compromise will reveal both parties’ priorities and how much influence each party had in the negotiation.
The agreement would institute spending caps that keep nondefense spending roughly flat in the 2024 fiscal year and increase it by 1% the following year, although it is important to note that these numbers don’t take into account inflation and are likely to be cut in real terms, as inflation will likely increase by more than 1% in the following year. Additionally, the agreement would rescind about $30 billion in unspent coronavirus relief money from unobligated money from many programs that received aid in the pandemic, such as rental assistance and small business loans. However, some funding is exempt including veterans’ medical care, housing assistance, and the Indian Health Service. The agreement also claws back $21.4 billion of the $80 billion that the IRS received from the Inflation Reduction Act, imposes stricter work requirements for food stamps, speeds up review of permits for new energy projects, and terminates the student loan freeze.
Policy Analysis
On one level, Democrats lost through this compromise even happening. Biden earlier refused to argue over the debt ceiling by principle, but was forced to negotiate when it was clear that Republicans wouldn’t cave in by that principle alone. Moreover, the Democrats allowed a slight Republican minority in the House to hold them hostage when they had a sizable minority in the House and controlled both the Senate and the Presidency.
However, given that the deal occurred, it included both wins and losses for both parties and overall represented a short- term compromise that didn’t decisively affect the long-term financial future of the country.
On Spending Caps, the Democrats won, as they were able to leave most programs unscathed and got the Republicans to budge from their insistence on substantial spending cuts, although they missed the opportunity to negotiate an increase in spending on those programs.
On COVID-19 claw backs, the Democrats won because the funds that were taken were unspent and mostly unobligated, meaning that the money wasn’t actively being used, protecting these programs for the near future. Additionally, many programs were left intact, including $5 billion to support research into new COVID treatments, $800 million in investments for the Defense Production Act, which includes efforts to bolster pharmaceutical supply chains, and funds for the Centers for Disease Control and Prevention to detect emerging variants.
Regarding the IRS funding, Democrats won because only $1.4 billion of the $21.4 billion will be rescinded and another $10 billion a year will be redirected to other federal agencies in fiscal years 2024 and 2025 during the annual appropriations bill, accounting for the other $20 billion. Although this seems huge, the cuts likely won’t substantially affect the operation of the IRS since they have time to adjust to these changes and they received $80 billion in the Inflation Reduction Act last year.
Concerning work requirements, Democrats won because they managed to negotiate work requirements that kept most of the programs intact and negotiate exceptions for homeless people, veterans, and recent foster youth and in some cases expanded programs like the Supplemental Nutrition Assistance Program (SNAP) and the Congressional Budget Office estimates that the deal would actually increase spending overall.
On energy permits, Democrats won as there were no sweeping regulatory changes and the changes do not substantially affect agencies’ ability to conduct environmental reviews of proposed projects. Importantly, the Republicans were unable to touch $369 billion in clean-energy incentives granted by President Biden’s Inflation Reduction Act, which was one of Biden’s signature achievements.
Republicans’ lone win came in terminating the student loan freeze. The student loan freeze has been repeatedly extended by executive actions by both Presidents Trump and Biden since the beginning of the pandemic. This deal would block the President from offering any further extensions past the Biden administration’s stated plan of resuming student loan payments later this year.
This deal protects most of the Democrat’s legislative victories and Republicans were unable to win a majority of the issues. Republicans got small concessions on many major issues, but they mostly fell short of what the party would have liked, as Democrats were able to avert major damage, even on the student loan payment freeze, which they already committed to ending anyways, but just made that commitment legally binding.
Engagement Resources
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