Let’s Make a Deal

On January 7, Republican House Speaker Mike Johnson (R-LA) and Democratic Senate Majority Leader Chuck Schumer (D-NY) announced key elements of a FY 2024 spending deal that would pave the way for appropriators in the House and Senate to begin drafting and negotiating the contents of the 12 annual discretionary spending bills. Specifically, the two leaders endorsed the topline spending levels for FY 2024 enumerated in last year's bipartisan debt limit agreement, the Fiscal Responsibility Act of 2023(FRA), and renegotiated the elements of the "side deal" originally inked between Schumer and former House Speaker Kevin McCarthy.

Basics of the Johnson-Schumer Agreement

Under the terms of the Johnson-Schumer agreement, "base" defense and nondefense discretionary spending ("base" meaning, non-emergency and exclusive of cap adjustments) will remain at the caps enacted by the FRA: $886.3 billion for defense, and $703.7 billion for nondefense. This point is not trivial. In 2023, House Republicans drafted appropriations bills below the FRA spending levels, arguing that the defense and nondefense caps were ceilings, not floors (technically correct, but a violation of the spirit of the law and loaded with the power to derail the entire appropriations process). Speaker Johnson's endorsement of the FRA spending levels as the target amounts for FY 2024 is vitally important for moving the appropriations process forward.

Base defense discretionary spending under the deal would amount to a 3.2 percent increase ($27.9 billion) in FY 2024 over actual FY 2023 results, whereas base nondefense discretionary spending would shrink 8.1 percent ($62.2 billion). With 3.3 percent annual inflation (approximately), the base defense budget is essentially flat in real terms and the cuts/savings to base nondefense accounts are significant.

HOWEVER, the provisions of the Johnson-Schumer "side deal" would provide an additional $69 billion in budget authority for nondefense discretionary accounts (more on this below). The agreement also fully funds the cap adjustments allowed under current law, which add another $25.5 billion in nondefense discretionary spending in FY 2024. (These same cap adjustments-for wildfire suppression, disaster assistance, and program integrity efforts like continuing disability reviews-added $25 billion to nondefense spending in FY 2023.) When all three nondefense pieces are combined, the Johnson-Schumer deal would allocate $798.2 billion for nondefense discretionary spending-a 0.9% increase when compared to FY 2023. In other words, the "side deal" eliminates the savings enacted in the FRA.

SIDE NOTE: What's the Deal with the "Side Deal?"

The "side deal" originated as an unofficial, unpublished rider to the FRA-a gentleman's agreement between then-Speaker McCarthy and Senate Majority Leader Schumer. It was a list of budget sleights of hand that House and Senate appropriators were authorized to use to paper over FY 2024 nondefense discretionary spending in the annual appropriations bills above the limit set by the FRA. Media reports at the time pegged the amount at $69 billion.

When McCarthy lost the Speaker's gavel, House Republicans also jettisoned his FRA side deal with Schumer. The new Johnson-Schumer spending agreement announced on January 7 retains some features of the original side deal-namely, it would facilitate a $69 billion increase in nondefense discretionary spending above the FRA cap-but with a slightly different mix of gimmicks.

Johnson-Schumer Side Deal Merely Exchanges One Set of Budget Gimmicks for Another

A combination of retirements and illness among House Republican lawmakers has left Speaker Johnson with a temporary but ultra-narrow two-seat majority, and the newly reconfigured "side deal" reflects Johnson's diminished leverage. Democrats retained the $69 billion in nondefense spending above the FY 2024 cap; Johnson merely succeeded in exchanging one set of gimmicks for another.

Budget gimmicks that were trimmed in the Johnson-Schumer side deal:

• No-outlay CHIMPs.CHIMP is an abbreviation for Changes in Mandatory Programs, a common but egregious backdoor spending device. When appropriators use a CHIMP, they rescind dormant budget authority in a mandatory program (which is not subject to spending caps and was never going to be spent) and use those illusory "savings" to offset increases in discretionary appropriations that ARE subject to the caps. The net effect is zero change in budget authority (the authority to spend is merely shifted from mandatory programs to nondefense discretionary programs) but an increase in outlays-and the latter adds to the budget deficit. The Johnson-Schumer deal reduces the approved amount of no-outlay CHIMPs in FY 2024 from $25 billion to $15 billion.
• Emergency funding in base. By law, the Congressional Budget Office (CBO) is required to include emergency-designated spending from the prior year in its budget baseline, even if the money is for a one-time purpose. Moreover, that money is indexed for inflation in the next baseline, just like all other discretionary spending. The net effect is an inherent bias towards higher spending in annual appropriations bills (again, CBO is directed by law to do this-the agency doesn't have a choice). In some cases, however, CBO will deviate from this standard, but only after reaching consensus with the House and Senate Budget Committees in Congress. For example, CBO did not extrapolate into future years the $184 billion in discretionary budget authority provided during the pandemic for COVID-19. The original McCarthy-Schumer side deal would have added $23 billion in emergency-designated spending back into the budget baseline (which would be indexed to inflation in future years); the Johnson-Schumer side deal trimmed that amount to $12.5 billion, a reduction of $10 billion.

Budget gimmicks that were added or expanded in the Johnson-Schumer side deal:

• IRS rescissions. President Biden's Inflation Reduction Act of 2022 provided the IRS with $78.9 billion in mandatory (not discretionary) funding to be available for FYs 2022 through 2031. The IRS plansto use the funds to improve customer service, upgrade its computer systems, and increase audits of high-income taxpayers, large corporations, and complex partnerships. Republicans oppose the new bucket of IRS money and have vowed to rescind it. The McCarthy-Schumer side deal would have rescinded $10 billion of mandatory IRS spending over the FY2024-2031 window; the Johnson-Schumer agreement doubles that amount to $20.2 billion. Less money for tax law enforcement , however, will mean less revenue to the Treasury-and bigger budget deficitsin the future. For example, in November 2023, CBO estimatedthat a House proposal to rescind $14.3 billion from the IRS (included in a bill to provide emergency aid to Israel) would increase the 10-year deficit by $12.5 billion.
• Commerce Department rescission.This provision doesn't meet the classical definition of a CHIMP (it's discretionary, not mandatory, spending), but it works in a similar manner. The FRA rescinded $27 billion of expiring pandemic relief funds and re-appropriated $22 billion to the Commerce Department's Non-Recurring Expense Fund (NRF)-$11 billion in discretionary budget authority to be available in FY 2024 and FY 2025. Normally this fund incurs expenses in the tens of millions, not billions, which suggests the expiring budget authority was "parked" at the Department of Commerce (an agency whose spending is categorized as nondefense) where it could be rescinded and redeployed for other nondefense programs in future appropriations legislation. Indeed, the original McCarthy-Schumer side deal would rescind the $11 billion allocated by the FRA for FY 2024-discretionary money that previously was expiring and would not be spent-and redeploy the "savings" in other nondefense discretionary programs. The Johnson-Schumer agreement would increase the amount of the Commerce NRF to $12.4 billion by accelerating the availability of the FY 2025 allocation.
• COVID-related rescissions. This is another potential CHIMP gimmick.According to media reports, the Johnson-Schumer deal would claw back $6.1 billion in unspent COVID funds. A leaked memo to Senate Democrats said most of the rescissions would come from the Department of Health and Human Services and "include funds returned by states that were unspent at the end of their project period." If true, CBO is unlikely to credit much, if any, outlay savings to the provision.

One Possible Win for Fiscal Responsibility?

Notably missing from the Johnson-Schumer topline spending deal is $13.7 billion in emergency-designated spending that the chairman and ranking member of the Senate Appropriations had previously (and unilaterally) said they would add to Senate spending bills after enactment of the FRA-$8 billion for defense and $5.7 for nondefense. If this holds, it would be a small win for fiscal responsibility.

Does This Mean All Elements of a Spending Agreement Are Now in Place?

No. While the Johnson-Schumer agreement is an important first step, lots of hard work and additional rounds of negotiation remain. Appropriators have topline numbers for defense and nondefense locked down but must now agree on how to apportion those amounts among the 12 annual appropriations bills. In addition, appropriations bills are prime targets for policy riders. Expect tough fights on bill language relating to abortion, transgender rights, border policy, climate change, and more.

Moreover, The Senate is still trying to negotiate an emergency aid package for Ukraine, Israel, Taiwan, and the U.S border with Mexico. Media reports suggest disagreements over changes to asylum and parole policies are bogging down negotiations. In the meantime, the Biden administration says it has exhausted its military and financial support for Ukraine; the conflict between Israel and Hamas is threatening to expand into other areas of the Middle East; and China is increasingly harassing ships in the South China Sea. Pressure is building on Congress to act on a supplemental aid package.

Many "known unknowns" remain to be hashed out before Congress can finalize a deal on FY 2024 appropriations.

Let's Make a Deal

With partial government funding set to expire on January 19, followed by the rest of government on February 2, Congress will need to pass another short-term continuing resolution (CR)-the third this fiscal year-to avoid slow-walking into a government-wide funding lapse.

Ordinarily, a clean short-term patch at this juncture-with a topline locked in place-would be relatively easy to pass, but Speaker Johnson famously (and perhaps naively) said the "laddered" CR from November, which established the current bifurcated funding deadlines, would be the last the House would entertain. Will he reverse himself?

At the same time, the Speaker is defending himself against major backlash from within his own conference over the spending deal, and his MAGA flank wants to shut down the government entirely until President Biden declares a national emergency and seals the U.S. southern border.

Getting a topline agreement was low-hanging fruit. The real work begins now.

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