What’s in the Fiscal Responsibility Act?
The new debt ceiling agreement that President Biden and Speaker of the House Kevin McCarthy (R-CA) struck has been signed into law. Instead of lifting the debt ceiling, the Fiscal Responsibility Act (FRA) suspends it until 2025, the year following the next presidential election.
The FRA falls far short of the cuts in the Republican version that the House passed in April 2023 and makes no changes to the GOP’s long-standing Social Security and Medicare targets. However, it contains several reforms linked to domestic expenditure. According to the Congressional Budget Office (CBO), the measure will cut the federal deficit by nearly $1.5 trillion over ten years. The focus of the new law is on discretionary spending. The notable provisions cover the following:
The Fiscal Responsibility Act
- IRS funding. As of 2022, the Inflation Reduction Act (IRA) includes an additional $80 billion in funding for the tax agency. The intentional allocation of this money was for stepped-up enforcement actions against wealthy taxpayers. The FRA withdraws $1.39 billion right away and reduces financing for 2024 and 2025 by almost $10 billion annually. White House representatives have nevertheless stated that they anticipate the funding reductions to have little impact on the IRS’s future expansion plans. This is because the organization had intended to use the initial cash over several years. It may be possible to use part of the money now that was set aside for later years. Then, they can go back to Congress to ask for more money later.
- Spending caps. Non-defense discretionary financing for initiatives, including scientific research, domestic law enforcement, forest management, environmental protection, air traffic control, and nutritional support for new mothers, was one of the more divisive topics of discussion throughout the discussions. The end effect is a virtual freeze on this spending, partly made possible by the IRS receiving less revenue. Compared to this fiscal year, spending will decrease by nearly $1 billion in 2024. There will also be a 1% increase for 2025. Given the prediction that inflation is to increase by more than 1%, this translates to a reduction. The total non-defense expenditures for 2024 and 2025 are $704 billion and $711 billion, respectively.
- Defense and veterans affairs spending. The FRA provides inflation-adjusted financing for the military and veterans affairs for Biden’s scheduled year, 2024. By 2024 and 2025, total defense spending will increase to $886 billion and $895 billion, respectively.
- Student loan debt. The new law makes official Biden’s earlier declaration that the COVID-19 pandemic-related freeze on student loan payments will not continue through this summer. The law does not permit his proposal to forgive $430 billion in student loan debt for many debtors. (However, the U.S. Supreme Court is currently examining the idea.)
- Work requirements. While Medicaid participants won’t, some recipients of the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF) payments must comply with new employment requirements. In particular, the FRA gradually rises the maximum age at which adults without children residing in their households must be employed to receive SNAP benefits from 49 to 54. However, veterans, people without housing, and people under 24 who were raised in foster care are exempt from the law. Additionally, it has provisions that could lead to more people fulfilling job requirements to obtain TANF payments through their state programs. However, the CBO predicts that the different modifications will increase the number of people receiving aid.
- COVID-19 clawback. A large portion of the COVID-19 relief monies that are yet unspent, which are projected to total $30 billion to $70 billion, will be “clawed back.” However, some funds will be kept, including a vaccine portion.
- Permitting for energy projects. The FRA contains regulations to facilitate the issuance of permits for new energy projects, particularly those utilizing fossil fuels.
The bottom line
As previously mentioned, the initial House debt ceiling bill was significantly more aggressive. Republicans pushed for deeper spending cutbacks and stricter employment standards. Additionally, they sought to eliminate the IRA’s hundreds of billions in tax incentives for renewable energy and climate change mitigation. Democrats wanted to increase taxes on businesses and taxpayers who make more than $400,000 on the other side of the political aisle. Additionally, they intended to put policies in place to lower Medicare’s expenditures on prescription medications. These objectives are outside the current law.
According to experts, the outcome of the most recent debt ceiling dispute is similar to the expected result of budget negotiations in a divided government. Additionally, we expect additional appropriations-related laws in the upcoming months. These “agreed upon adjustments” could mitigate the effects of some of the budget reductions. Contact our RRBB accountants and advisors if you have any questions on how the Fiscal Responsibility Act may affect you.
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