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May 06, 2023

President Signs Compromise Fiscal Responsibility Act: Debt Ceiling Suspension Paired with Spending Caps Enforced by Sequestration

Client Alert | 5 min read | 06.02.23 After weeks of tense negotiation between

Client Alert | 5 min read | 06.02.23

After weeks of tense negotiation between the White House and House Speaker Kevin McCarthy (R-CA), the Fiscal Responsibility Act, H.R. 3746 (the Act) has passed both chambers of the U.S. Congress and awaits President Biden's signature. The compromise agreement pairs a two-year suspension of the $31.4 trillion debt ceiling (through January 1, 2025) with cuts in federal spending. The agreement automatically reinstates the debt limit to the amount of debt outstanding on January 2, 2025; defense and nondefense discretionary spending would be subject to caps — allowing for certain exceptions — which would be enforced by sequestration. The legislation also makes several policy changes, including: a rescission of a portion of funds provided to the IRS in the Inflation Reduction Act that cover enforcement activities through 2031; a rescission of $27 billion of budget authority from a broad collection of accounts related to the federal government's response to the COVID-19 pandemic; an overhaul of permitting reviews for energy projects; and higher age limits for work requirements on certain federal safety net programs. The legislation also codifies pay-as-you-go (PAYGO) requirements for the executive branch. The agreement, in large part, averts significant cuts to federal spending and preserves President Biden's key climate, infrastructure and health priorities enacted in the first two years of his administration.

The legislation is a compromise between Republicans, who aimed for larger spending reductions, and the White House, which wanted a clean debt limit bill with no spending cuts. House Republicans had passed legislation in late April that would have reduced projected budget deficits by nearly $5 trillion over 11 years. The Congressional Budget Office (CBO) forecasts the bipartisan legislation will reduce deficits by $1.5 trillion over 11 years, assuming that Congress follows through on nonbinding spending caps after 2025.

This Client Alert includes a high-level summary of some of the Act's key provisions.

Conclusion. With the agreement secured and the default crisis averted, it's important to consider the overall impact of the debt ceiling agreement. The most significant impact of the Act on the budget results from caps on discretionary funding. Of the projected $1.5 trillion in reductions over the next decade, discretionary outlays account for $1.3 trillion. Net mandatory spending would decrease by $10 billion, and net revenues would reduce by $2 billion between 2023–2033. The policy changes will have a more enduring impact and also set the stage for additional investments in areas such as permitting reform and other infrastructure projects. However, the biggest potential impact of this agreement may be that with pressure on Congress to enact the complete set of budget appropriations bills by the end of the calendar year there could be more legislative vehicles that move through Congress than anticipated. This could create more opportunities to advance policy initiatives than is typical with the large end-of-the year funding bills we have seen of late.

Aaron C. Cummings

Partner

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Stacie Cullison Heller

Senior Policy Director

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W. Scott Douglas

Senior Policy Director

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The Financial Action Task Force (FATF) published its Fourth Round Mutual Evaluation Report (MER) on Qatar's Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) regime on May 31, 2023.[1] The highly anticipated report renders an authoritative verdict on AML/CFT improvements implemented by Qatar during a time when the Gulf country was simultaneously managing the 2017-2021 blockade crisis, a worldwide pandemic, and FIFA World Cup Qatar 2022. The evaluation generated a high level of interest among FATF watchers because Qatar is the first GCC country to undergo FATF scrutiny following FATF's placement of UAE on its "Grey List" of countries under increased monitoring. ...

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