I’ve noted some confusion about the spending caps set in law for Fiscal Year 2024 and 2025 and the moving of the debt ceiling to a date-certain limit (January 1, 2025) rather than agreeing to a dollar-certain limit.
First of all, the next Congress convenes on January 3, 2025, which means the next debt ceiling agreement will be negotiated by a Republican House, a Democrat Senate and a Democrat White House (same configuration as now) regardless of the results of the 2024 election. Further, it is now in law that Congress can spend no more than was spent in FY 2022 for FY 2024. This is a cut in spending.
FY 2025 spending is now limited by law to a 1% increase over FY 2022 levels for non-defense discretionary spending programs. Military spending, the other major part of discretionary spending as a category, is limited to a 3% increase.
Second, it is not the debt ceiling — whether it is date certain or dollar certain — that increases spending. It is mandatory spending that drives the debt. That plus discretionary spending increases are what result in annual deficits and additional aggregate debt. Congress has no say over the trajectory of mandatory spending without changing those programs, which combined with debt service payments account for 75% of the total federal budget. Keep in mind Social Security and Medicare are the two largest mandatory spending programs. Discretionary spending, the other 25% of the federal budget, is determined by Appropriations passed by Congress, of which more than half of that is funding for the military.
For those who feel like the debt limit shouldn’t have been increased, it’s helpful to consider these facts:
Assuming you keep the debt limit constant (no increase) until January 1, 2025, you would have to cut 35% across the board for all programs. This would be a cut of 35% to mandatory spending programs (i.e., Social Security, Medicare, and other spending required by law) as well as discretionary spending items such as funding the military, cancer research, funding for the Army Corps of Engineers, etc., etc.
If you take Social Security, Medicare, and funding for the military off the table, you would have to cut 85 percent of all other programs across the board, including veterans’ benefits, cancer research, transportation and infrastructure projects, local law enforcement grants, the passport offices, and the list goes on and on.
Finally, in addition to flattening the spending curve, growing the economy is essential to deficit reduction. Every 1% percent increase in GDP translates to $5 trillion in deficit reduction. I’ll not recite all the great reforms made as part of the deal outlined in a previous newsletter, but each and every one of them will help grow the economy and mitigate any recession.
