What the Fiscal Responsibility Act of 2023 Means for Defense Spending

On June 3, 2023, President Biden signed into law the Fiscal Responsibility Act of 2023, an agreement to suspend the debt ceiling through January 1, 2025. The law imposes limits on discretionary spending for defense and non-defense programs in exchange for lifting the debt ceiling before the government ran out of funding to pay federal obligations. The act is estimated to reduce projected deficit levels by approximately $1.5 trillion over the 10-year FY 2024–FY 2033 period, according to analysis by the Congressional Budget Office (CBO). Below are four critical questions about the agreement and its implications for national defense.

Q1: What does the deal mean for defense spending?

A1: The debt ceiling agreement imposes spending limits on both defense and non-defense programs for the next two fiscal years. While it mandates reductions in funding for non-defense, the deal caps spending for national defense, including the Department of Defense (DoD), atomic energy programs, and other defense-related programs, at $886 billion, approximately equal to the level requested by the Biden administration for FY 2024. When adjusted for inflation using the administration’s estimated GDP Chained Price Index, that represents a real increase of just about 1 percent above the base level of national defense spending for FY 2023.

Photo: CSIS

The spending caps for FY 2025 for both defense and non-defense programs are one percent higher than the FY 2024 topline limits in nominal terms. However, adjusted for inflation, defense funding would fall by 1 percent from FY 2024 to FY 2025 with funding capped at approximately $895 billion. The Biden administration had originally projected that defense spending would remain flat with inflation from FY 2024 to FY 2025.

CBO’s analysis that the Fiscal Responsibility Act would reduce projected deficits by about $1.5 trillion over 10 years assumes that discretionary funding for both defense and non-defense programs would only grow with inflation between FY 2026 and FY 2033. However, if discretionary spending for defense and non-defense increases above inflation after FY 2025, the estimated savings will likely decrease.

Q2: How does this deal compare with previous debt ceiling and budget legislation?

A2: The Fiscal Responsibility Act amends existing U.S. Code on discretionary spending limits to impose budget caps on defense and non-defense programs for two years in FY 2024 and FY 2025. This is the same section of U.S. Code that was originally amended by the Budget Control Act of 2011 (BCA) and subsequentlegislation to establish budget caps on discretionary spending for a longer, 10-year period between FY 2012 and FY 2021. The BCA was passed following a similar standoff in which congressional Republicans sought cuts to spending to reduce the federal deficit in exchange for increasing the debt ceiling. The origins of the law date back to the Balanced Budget and Emergency Deficit Control Act of 1985, also known as the Gramm-Rudman-Hollings Act.

The budget caps for FY 2024 and FY 2025 mandated by the Fiscal Responsibility Act are enforced by sequestration—“the automatic process of imposing across-the-board budget cuts”—which is triggered if Congress appropriates funding above the limits. The cuts are applied as a uniform percentage cut across all DoD accounts (although the president may exempt or limit reductions to military personnel (MILPERS) accounts to ensure servicemembers receive pay and benefits). Sequestration was originally imposed by the Gramm-Rudman-Hollings Act and applied under the BCA era when it was used in 2013. It remains applicable under the current agreement because the law did not change its use in U.S. Code.

Q3: How does the deal affect the appropriations timeline for FY 2024?

A3: The budget agreement and its established toplines for defense and non-defense spending for FY 2024 hypothetically clear the way for the passage of appropriations by the start of the fiscal year on October 1. Since FY 2000, defense appropriations have only been passed on time on six occasions, the last being in FY 2019. The topline spending level for that year had already been negotiated under the previously passed Bipartisan Budget Act of 2018.

However, existing budget agreements are no guarantee that Congress will appropriate funding by the start of the fiscal year. Despite having a budget deal (the Bipartisan Budget Act of 2019) that designated topline defense spending levels for FY 2020 and FY 2021 before the beginning of the fiscal year, DoD started each of those two years operating under a continuing resolution. Consequently, regular, on-time appropriations for FY 2024 could similarly be derailed by disagreements below the topline level, the legislative schedule, or other political issues.

The Fiscal Responsibility Act outlines measures to incentivize Congress to pass regular appropriations. According to the law, if any discretionary budget account—defense or non-defense—is still funded under a continuing resolution by January 1, 2024, the budget caps will be reduced from the figures outlined above to FY 2023 enacted levels reduced by 1 percent. However, the severity of this measure is largely limited. The caps revert back to the original levels as soon as all regular appropriation bills are passed.

Q4: Will the agreement impact U.S. security assistance to Ukraine?

A4: The bulk of security assistance spending allocated for Ukraine since the start of the war with Russia has been appropriated by Congress as emergency supplemental funding, which under U.S. Code is exempt from the budget caps. A White House official also confirmed that the passage of the budget agreement would not limit future assistance packages for Ukraine.

However, supplemental appropriations have previously been exploited as a loophole to provide additional funding for defense beyond the budget caps. During the BCA era, the Obama and later Trump administrations used supplemental appropriations intended to cover the incremental costs of operations in Afghanistan and Iraq, known as Overseas Contingency Operations (OCO) funds, to fund some base budget activities not directly related to those wars. Congress also funded base budget priorities through OCO and used the account to “grease the wheels” in passing budget agreements to raise the spending caps.

While the separate OCO request was discontinued under the Biden administration, lawmakers have expressed a willingness to once again use exempted emergency supplemental funds to increase defense spending above the budget caps imposed by the Fiscal Responsibility Act. Senate Armed Services chair Jack Reed (D-RI) suggested Congress “might put other stuff in” future Ukraine assistance packages to work around “this incredible mousetrap.”

Seamus P. Daniels is a fellow for Defense Budget Analysis in the International Security Program at the Center for Strategic and International Studies in Washington, D.C.