The U.S. debt limit looms in early summer, with current estimates suggesting that Treasury may run out of borrowing authority under the $31.4 trillion debt limit sometime in June or July. Earlier this year, House Republicans committed to pairing any increase in the debt limit with spending reforms—a key demand before electing a new House Speaker. By targeting discretionary spending, members expect to make an immediate down payment toward more responsible fiscal policy and assert their policy priorities.

The agreement House Republicans struck with Speaker Kevin McCarthy (R‑CA) highlights a likely direction for debt limit negotiations this summer. The following priorities are especially relevant to understanding GOP strategy:

• Cap fiscal 2024 discretionary spending at enacted fiscal 2022 levels or lower.
• Reject any negotiations with the Senate unless that chamber’s 12 spending bills are passed, the bills comply with the House budget resolution, and they reduce non-defense discretionary spending.
• Not agree to a debt limit increase without a budget agreement or “commensurate fiscal reforms.”

There are several methods by which House Republicans could return discretionary spending for fiscal year (FY) FY2024 to FY 2022 levels. Reaching this goal requires $131 billion in base spending reductions. If factoring in additional spending for federal disaster accounts, or so-called adjustments, Congress would need to reduce overall spending by $133 billion. The below table lists base discretionary spending levels for FY23 and FY22, compared to pre-pandemic levels in FY19.

Following is a series of tables that show outcomes of some different possible scenarios for discretionary spending levels if the GOP plans are adopted and enforced.

Return Discretionary Appropriations to their FY22 Levels

Discretionary appropriations are generally split into defense and non-defense categories. Defense is a core function of the federal government, funding activities related to U.S. national security. Non-defense, also often called domestic discretionary spending, includes funding for domestic law enforcement, national parks, environmental protection, the judicial system, civilian infrastructure, education, and scientific research. While there is some overlap among member interests, Republicans will often advocate for higher defense levels while Democrats will make the case for higher non-defense or domestic spending.

One simple and clear way that Congress could return to FY2022 levels is to adopt those same levels for both defense and non-defense spending. This would reduce discretionary spending by $131 billion (8 percent) compared to FY2023 spending levels.

Compared to FY19 pre-pandemic spending levels, total discretionary spending would still be higher by $28 billion or 2 percent, after adjusting for inflation through 2022. This outcome would be similar to a recommendation I made last fall, to return total discretionary spending to FY2019 levels and cap its growth at no more than 2 percent annually.

Reducing discretionary spending to pre-pandemic levels makes sense. It would be irresponsible for lawmakers who bulked up emergency deficit spending at the height of the COVID-19 pandemic to establish a higher spending baseline for years to come. As pandemic needs have wound down, so should government spending.

Cut Only Non-Defense Discretionary Spending

The above strategy is unlikely to succeed because it would pit Republicans against each other. As spending cap negotiations over the past decade demonstrated, splitting the Republican conference into two factions increases the likelihood that so-called GOP defense hawks will side with Democrats to raise overall discretionary spending. House members may instead seek to unite Republicans by freezing defense discretionary spending (or allowing for a small increase) while returning non-defense discretionary spending to pre-pandemic (FY2019) levels.

Returning non-defense discretionary spending to FY2019 levels in FY2024 would free up $16 billion in additional spending for defense, while still returning overall discretionary spending to FY2022 levels. Non-defense discretionary spending would be reduced by $147 billion (20 percent), compared to FY23.

Cut Only Some Non-Defense Discretionary Spending, and Increase Defense

Republicans do not consider all non-defense discretionary spending equally wasteful or outside the proper scope of the federal government. If Republicans singled out certain non-defense discretionary bills from spending cuts, while increasing defense by 4 percent, the remaining bills would face even larger spending reductions.

If we assume that 1) Republicans would prefer to avoid cuts to the following appropriations bills: Homeland Security, Military Construction and Veterans Affairs, and State Department and Foreign Operations; and 2) that Republicans would want to protect defense from a decline in purchasing power in FY2024; and 3) that 4 percent inflation is likely in 2023, the remaining non-defense spending bills, covering programs for education, transportation, scientific research, and more, would roughly be cut by one-third to return overall levels to FY22.

Offset Discretionary Spending with Mandatory Spending Reductions

One way both parties could come to an agreement to avoid some cuts in discretionary spending, while still arriving at their goal of reducing spending to comply with FY22 levels, would be to adopt spending reductions in mandatory programs to offset additional spending on the discretionary side of the budget ledger. The House strategy agreement calls to “Not agree to a debt limit increase without a budget agreement or ‘commensurate fiscal reforms,’” which leaves significant room to negotiate.

There’s also precedent in cutting such deals. Discretionary spending cap negotiations that took place over the past decade under the requirements of the Budget Control Act of 2011 achieved some mandatory spending reductions in exchange for higher discretionary spending levels. Those negotiations also demonstrated the need to put limits on emergency spending, which were regularly exploited as loopholes to increase discretionary spending above agreed-upon topline levels.

Discussion

Political negotiations require compromise. The third strategy of cutting only some non-defense discretionary spending in half, while increasing defense, has the lowest likelihood of success. And while the first strategy would allow for spending reductions to be spread out across programs, Republicans are unlikely to unify around a strategy that would reduce defense spending at a time of geopolitical uncertainty and rising tensions between China and Taiwan. The most likely strategy to succeed will set FY2022 discretionary spending levels as the goal while allowing for mandatory spending reductions to offset additional discretionary spending.

Regardless of which strategy Republican House members will ultimately settle on, discretionary spending cuts alone will not stabilize the growth in the debt. Nor will a mix of mandatory and discretionary spending reductions in the range of $130 billion put the U.S. on a more sustainable fiscal path. The growth in popular entitlement programs is largely responsible for increases in deficits and debt. As I wrote previously in a Cato policy brief on “A Fiscal Agenda for the 118^th Congress”:

“Entitlement spending growth will be responsible for the bulk of the increase in budget deficits over the next 10 years. Of the $21.1 trillion deficit projected from FY 2022 to FY 2032, [more than half or] nearly $12 trillion is due to deficit spending on Medicare and Social Security.”

In an attempt to score a short-term win, Congress should not lose sight of the magnitude of compromise required to stabilize U.S. debt over the next decade and beyond. U.S. public debt is projected to grow from 95 percent of GDP to 138 percent of GDP in just the next 10 years. Stopping the growth in debt as a share of the economy would require at least $7 trillion in spending reductions—that’s 53 times the amount of spending reductions ($130 billion) currently under discussion.

Instead of tinkering around the edges, the 118th Congress should commit to a credible fiscal stabilization path that controls the growth in the debt. This must include reforming health care and old-age entitlement programs, a process that is unlikely to happen without a shared understanding of the economic costs and threats of high and rising government deficit spending and debt, and a bipartisan commitment to reverse course. The current debate over the debt limit offers a welcome opportunity to shed light on the drivers of rising spending and debt and how leaving the U.S. fiscal house a mess reduces family incomes, business investment, and opportunities to thrive and succeed.