July 19, 2019

With the Treasury Department now warning that it might breach the statutory ceiling on the public debt before Congress returns from its five-week summer recess after Labor Day, Congressional leaders are frantically negotiating with Treasury Secretary Mnuchin (and, possibly, other Trump Administration officials) on a two-year debt ceiling increase that would also increase the Budget Control Act’s ceilings on defense and non-defense appropriations for fiscal years 2020 and 2021.

House Speaker Nancy Pelosi (D-CA) said that she hopes to have the legislation on the House floor by next Thursday, which would (ideally) mean that the bill text would need to be released sometime this weekend.

The size of the annual spending cap adjustments is expected to be somewhere in the $350-ish billion ballpark over two years, which is close to the $355.5 billion in cap increases in the spending plan adopted by House Democratic leaders earlier this year and to which they have drafted their 2020 appropriations bills. The overall totals could be $10-20 billion lower, we’re not sure about the first year vs second year increases, and the defense vs non-defense split might be a little different, but the aggregate spending increase being discussed appears to be well north of $300 billion over two years. The specifics of the House Democratic plan are:

Without a cap increase, a “clean” continuing resolution that simply extended all fiscal 2019 appropriations into 2020 would face automatic sequestration reductions of about 9 percent (since the current law FY 2020 cap is $53.8 billion below the 2019 enacted non-defense total of $597 billion). And if the pending House-passed 2020 appropriations bills were suddenly enacted into law, without a cap deal, the non-defense appropriations in those bills would be cut across the board by 13.9 percent via sequestration.

For both categories of spending (defense in particular), it’s not just about the spending cap level, it’s also about selecting which appropriations are not subject to the caps. In defense, for example, the Trump Administration’s FY20 budget proposed to allow the defense cap to revert from $647 billion back down to $576 billion, but then boost the Overseas Contingency Operations (formerly Iraq/Afghanistan/GWOT category) spending for defense, which is exempt from the cap, from $69 billion to a gobsmacking $165 billion to compensate.

On the non-defense side, House Democrats have proposed taking the FY 2020 Census out from under the caps (a one-time hit of $7.5 billion), and appropriators from both parties have been lobbying to take the spending needed to fulfill the VA MISSION Act (signed by President Trump in June 2018) out from under the caps as well, because spending under that bill will keep increasing and soon pass the $5 billion per year mark, which was unplanned when the spending caps were first established.

Then there is the politically difficult question of how much of the spending increase to pay for via offsetting spending reductions or revenue increases. The 2013 and 2015 bipartisan budget deals that increased the spending caps were, more or less, fully paid for (albeit by using back-loaded pay-fors counted over a 10-year period to offset spending increases taking place in the first two years). In the much larger February 2018 budget deal, Congress made a half-hearted attempt to pay for some of the increase (see CBO score here).

There is no word yet on how much of the $300+ billion in cap increases being discussed will be offset, but the Trump Administration is reportedly asking for a significant amount of offsets.

The easiest “pay-for,” which has been used in all the previous spending cap deals and which has apparently been agreed to by all parties, is to extend the sequestration of certain mandatory spending accounts into fiscal 2028 and 2029, which OMB recently estimated would save $50 billion over two years. (It is this sequestration that knocks 6 percent or so off of the $739 million in highway contract authority exempt from limitation every year.)

Beyond that, the biggest “pay-for” could be simply extending the spending caps themselves. Consider: the spending caps were a nine-year enforcement deal as a fallback option in the 2011 budget deal (they were imposed in FY 2013 and were to last through FY 2021, saving a fixed amount of money (purportedly). As of now, there are no spending caps starting in 2022, so CBO and OMB are forced to assume that discretionary spending thereafter will start increasing at the rate of inflation.

Because any two-year budget deal for FY 2020 and 2021 will also increase the last year of the caps, CBO and OMB have to interpret a change in the 2021 cap as increasing the starting point for all future post-2021 appropriations, which would blow away any savings they can scrape together for pay-fors.

Unless the budget deal also extends the caps for at least one year, into at least 2022, at a lower level than whatever the deal sets the 2021 caps at. Then, a lower starting point for the annual inflation increases would be booked as savings over the ten-year forecasting window.