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Background: Discretionary Spending Limits (Caps)
The congressional budget process, established by the Congressional Budget and Impoundment Control Act of 1974 (Budget Act; P.L. 93-344), was designed to be result-neutral. It gave Congress tools to evaluate and make changes to fiscal policy—Budget Committees, budget resolutions, and the Congressional Budget Office (CBO). The Budget Act was not designed to promote a particular fiscal policy.
Subsequent budget laws have added new procedures aimed at specific fiscal objectives. In 1985, the Balanced Budget and Emergency Deficit Control Act (BBEDCA, P.L. 99-177) sought to balance the federal budget through statutory maximum deficit amounts (deficit caps), and created the budget sequester mechanism—automatic across-the-board cuts in nonexempt budget accounts—to incentivize and enforce the intended result.
Budget Enforcement Act of 1990
In 1990 Congress shifted its budget control strategy from deficit caps to controlling the growth of spending and deficits. The Budget Enforcement Act of 1990 (BEA; P.L. 101-508) established statutory limits on discretionary spending (programs funded through annual appropriations). The BEA also established a new “pay-as-you-go” (PAYGO) deficit-neutrality requirement that legislation providing new mandatory spending, or reducing revenues, must be paid for with offsets. Violation of the discretionary spending caps, or the PAYGO requirement, were enforced using the sequester mechanism.
With the emergence of budget surpluses in the late 1990s, spending caps and PAYGO were allowed to expire in FY2002. By the end of the decade, however, concerns over budget deficits in the wake of the financial crisis and recession led to enactment of a new, permanent PAYGO statute in 2010, and new budget control legislation in 2011. The Budget Control Act of 2011 (BCA; P.L. 112-25) established new discretionary spending caps for each year through FY 2021, estimated to save $917 billion over ten years. The BCA also established a Joint Select Committee on Deficit Reduction (Joint Committee) to negotiate another $1.5 trillion in budget savings by December of 2011. As a fallback, the BCA provided that automatic spending reductions would be triggered if Congress did not enact at least $1.2 trillion in Joint Committee budget savings by January 15, 2012.
The January 2012 deadline was not met and $1.2 trillion in Joint Committee automatic reductions were triggered. The BCA applied most of the automatic budget savings to discretionary spending through reductions in the BCA spending caps (often called “sequester caps”), and the remainder of the savings were applied to mandatory spending through annual sequestration (across-the-board cuts in mandatory spending).
Subsequent legislation (four Bipartisan Budget Acts or “BBAs”) partially or fully rolled back the automatic discretionary cap reductions that were to take effect in each year through FY2021. However, the annual sequester of mandatory spending has been implemented each year—and extended numerous times, now in effect through FY 2031.
Budget Control Act of 2011
The Budget Control Act of 2011 (BCA; P.L. 112-25) was the result of negotiations between the President and Congress in response to two developments: (1) concern over annual budget deficits in the wake of the financial crisis and the 2007-2009 recession; and (2) the impending expiration of the Treasury’s borrowing authority under the statutory limit on the public debt (debt limit).
Two Tranches of Budget Savings: In order to secure agreement to raise the debt limit, the BCA included two tranches of budgetary savings: (1) discretionary spending caps saving an estimated $917 billion over 10 years; and (2) a “Joint Committee process” to achieve another $1.5 trillion in deficit reduction.
For the initial tranche of budgetary savings, the BCA placed statutory limits on discretionary spending for FY 2012 through FY 2021.
To accomplish the second tranche of savings, the BCA established a bipartisan, bicameral Joint Select Committee on Deficit Reduction (Joint Committee). The committee was to negotiate a broad deficit reduction package to reduce deficits by $1.5 trillion over 10 years. As a fallback, automatic spending reductions would be triggered if Congress failed to enact at least $1.2 trillion in budget savings by January 15, 2012.
The January 15, 2012 deadline was missed—triggering the automatic reductions. Under the BCA, most of the $1.2 trillion in automatic reductions was to be achieved through annual reductions in discretionary spending—by across-the-board sequestration in FY2013, and formulaic reductions in the defense and nondefense discretionary spending caps in FY 2014 through FY 2021. However, subsequent legislation (the Bipartisan Budget Acts explained below) rolled back much of these discretionary savings.
The remainder of the $1.2 trillion in savings was to be achieved through annual across-the-board cuts (sequestration) in all nonexempt mandatory spending. The automatic reductions in mandatory spending have been fully implemented—and extended for an additional 10 fiscal years through FY 2031.
Discretionary Spending Limits through FY 2021: The BCA established limits on discretionary spending for a 10-year period, FY 2012-FY 2021. Discretionary spending caps had previously been established by the Budget Enforcement Act of 1990 (BEA) and were twice extended in 1993 and 1997. However, when the federal budget was in surplus for four consecutive years—FY 1998 - FY 2001—the BEA caps were allowed to expire after FY 2002. Unlike the BEA caps that had placed limits on both budget authority and outlays for FY 1991 - FY 2002, the Budget Control Act of 2011 placed limits on budget authority alone.
Similar to the earlier BEA caps, the BCA caps were: (1) adjustable, effectively exempting certain types of spending from the caps; and (2) enforced through sequestration of budgetary resources in excess of the limits.
Categories: Security/Defense and Nonsecurity/Nondefense: Initially, for F Y 2012 and FY 2013, the BCA established spending limits for “security” and “nonsecurity” categories. Security included discretionary spending for the Departments of Defense, Homeland Security, and Veterans Affairs, the National Nuclear Security Administration, intelligence community management, as well as discretionary spending in the international affairs budget function. All other spending was included in the “nonsecurity” category. For FY 2014 through FY 2021, the BCA established only one cap, for all discretionary budget authority.
When Congress missed the January 15, 2012 deadline for enactment of a “Joint Committee” deficit reduction plan, the BCA automatically triggered: (1) reduced discretionary spending categories; and (2) automatic spending reductions to enforce the new caps.
The security category became a narrower “revised security” category consisting solely of defense spending—and was typically referred to as the “defense” category. The nonsecurity category became a broader “revised nonsecurity” category consisting of all other spending—and was typically referred to as the “nondefense” category.
The new defense and nondefense categories were extended through FY 2021, enabling automatic spending reductions to be applied equally to defense and nondefense spending.
Adjustments (Spending Exempted from the Caps): The 1985 Act (BBEDCA), as amended by the BCA and subsequent acts, allowed for upward adjustments to the defense and nondefense spending limits when discretionary appropriations are provided for certain purposes—effectively exempting that spending from the caps. Permissible adjustments included the following:
Funding designated in statute and by the President for the wars in Afghanistan and Iraq and related operations, referred to as “OCO” or “OCO/GWOT” for Overseas Contingency Operations/Global War on Terrorism, 2 U.S.C. §901(b)(2)(A).
Funding for spending designated in statute, and designated by the President, as an “emergency requirement.” There were no dollar limits on emergency designations. 2 U.S.C. §901(b)(2)(A).
Program integrity initiatives aimed at reducing improper benefit payments by the Disability Insurance (DI) and Supplemental Security Income (SSI) programs, known as continuing disability reviews (CDRs). CDR adjustments were subject to specified limitations, 2 U.S.C. §901(b)(2)(B).
Program integrity initiatives to reduce improper healthcare payments from Medicare, Medicaid, or the Children’s Health Insurance Program (HCFAC, Health Care Fraud and Abuse Control). HCFAC adjustments are subject to BCA limitations, 2 U.S.C. §901(b)(2)(C)
Disaster relief, subject to annual limitations tied to average disaster spending over the previous decade, 2 U.S.C. §901(b)(2)(D).
New budget authority for FY2019-2021 for “reemployment services and eligibility assessments” under section 306 of the Social Security Act, subject to limits, 2 U.S.C. §901(b)(2)(E).
New budget authority, above a threshold, for wildfire suppression operations for FY2020-FY2027, 2 U.S.C. §901(b)(2)(F).
Appropriations designated for the 2020 census, not to exceed $2.5 billion, 2 U.S.C. §901(b)(2)(G).
Cap adjustments by OMB to accommodate changes in budget concepts and definitions, in consultation with House and Senate Budget and Appropriations Committees, 2 U.S.C. §901(b)(1).
Enforcement of the BCA Spending Caps
In order to enforce the BCA spending caps, OMB was required to issue three regular appropriations reports each year, and a report following enactment of each appropriations bill:
Sequestration preview reports—included by OMB in the President’s February budget transmittal—provided the status of discretionary caps for the current year and each year thereafter through FY2021, based on current law and including adjustments.
Sequestration update reports, due by August 20 each year, provided a mid-year status report on enacted appropriations, if any, and cap adjustments.
Final sequestration reports—within 15 days after the end of the congressional session—provided final estimates of enacted appropriations, calculated permissible adjustments to the discretionary caps and, if it was determined by OMB that a breach had occurred in either of the categories, a presidential order implementing an across-the-board sequester.
OMB was also required to report on individual appropriations bills within seven days of enactment, providing estimates of budget authority (BA) and outlays provided by the legislation and, if current year supplemental funds are included, a determination of whether the additional BA would cause discretionary appropriations to exceed the defense or nondefense caps.
CBO was required to issue parallel reports five days prior to release of each OMB report, although only OMB reports can trigger enforcement actions (since cancellation of budget authority is an executive branch function). Section 254 of BBEDCA, as amended by the BCA, requires OMB to explain differences between OMB and CBO estimates.
End-of-Session Discretionary Sequester: The BCA discretionary spending caps were enforced through a sequestration process. Sequestration is the across-the-board cancellation of nonexempt “budgetary resources”—the collective term for new budget authority and unspent balances of budget authority from prior years. Sequestration was triggered if the final sequestration report issued by OMB indicated that discretionary appropriations in either the defense or nondefense categories exceeded the spending limit for that category. In the event of an overage, the President was required to issue a sequestration order canceling budgetary resources in that category by the uniform percentage reduction required to bring budget authority within the applicable spending cap.
The statutory requirements for the sequester process are prescribed in the 1985 Act (BBEDCA), as amended. OMB would determine the total dollar amount of necessary discretionary spending reductions, and the “sequestrable base,” which is the total amount of nonexempt discretionary spending in the relevant category (defense or nondefense). OMB would then calculate the uniform percentage by which non-exempt budgetary resources must be reduced to bring discretionary budget authority within the relevant statutory cap. Once a uniform percentage reduction was determined, it would be applied to all programs, projects, and activities (PPAs) within a budget account.
During the BCA period, there were no sequesters to enforce the defense or nondefense discretionary spending caps.
Within-Session Discretionary Sequester: Under the BCA, a within-session sequester would be triggered if a supplemental appropriation would cause a spending limit to be breached during a fiscal year. In this case, sequestration would occur 15 days after the enactment of the supplemental appropriation. However, if such a breach occurred in the last quarter of the fiscal year (i.e., July 1 through September 30), the applicable spending limit for the following fiscal year would be reduced by the amount of the breach.
Additional Spending Cap Enforcement through House and Senate Rules
The BCA also provided for enforcement of the discretionary spending limits by points of order during consideration of appropriations legislation (Section 314(f) of the Budget Act).
In the case of nondefense appropriations bills, the order in which the bills are considered determined whether a particular bill or amendment was vulnerable to a point of order—with the last bill up being the one vulnerable to violating the nondefense cap.
Supplemental appropriations would be vulnerable to a point of order if not covered by an emergency designation or disaster relief adjustment.
In the Senate, a motion to waive the section 314(f) point of order required an affirmative vote of three-fifths of Senators, duly chosen and sworn (i.e., 60 Senators if there is no more than one vacancy). In the House, a special rule waiving the point of order would require a simple majority vote.
Automatic (Joint Committee) Spending Reductions / Sequestration
The first tranche of budgetary savings required by the BCA established security and nonsecurity spending caps for FY 2012-F Y 2021, estimated to save $917 billion over a decade. The second tranche of $1.5 trillion was to be achieved through the Joint Select Committee on Deficit Reduction.
The BCA provided that if the Joint Committee process did not lead to enactment of $1.2 trillion in deficit reduction by January 15, 2012, implementation of automatic annual spending reductions would be triggered for FY2013-FY2021.
The BCA scheduled the automatic reductions to begin in January of 2013—leaving time for Congress, during 2012, to consider alternatives to the impending automatic reductions.
When alternatives were not forthcoming, the BCA required: sequestration of discretionary and mandatory spending in FY 2013; and for FY 2014-FY 2021, automatic spending reductions were to be implemented by lowering the discretionary spending caps and sequestering mandatory spending.
Subsequent legislation—the Balanced Budget Acts—rolled back much of the automatic discretionary cap reductions, although the annual sequestration of mandatory spending has been fully implemented—and extended for additional eight years through FY2031.
Calculating the Joint Committee Discretionary and Mandatory Reductions: When Congress missed the deadline to enact $1.2 trillion in Joint Committee deficit reduction, the BCA triggered automatic reductions in discretionary and mandatory spending. The reductions were calculated each year by OMB—following a detailed statutory formula—and the reductions were implemented by the President.
The Joint Committee reductions are calculated as follows:
To achieve the required $1.2 trillion of deficit reduction, the BCA first subtracted an amount for debt service savings, then divided the remainder over nine years to arrive at an annual required reduction of $109.3 billion for each fiscal year through FY 2021 (although the reductions for FY2013 were later reduced to $85 billion).
That amount was split equally between defense and nondefense spending, and each half was then allocated on a roughly proportional basis between discretionary and mandatory spending, although the 50-50 defense/nondefense split, along with numerous statutory exemptions and special rules, heavily skewed the impact of the reductions heavily towards discretionary spending cuts.
The resulting reductions in discretionary spending were to be implemented by lowering the BCA discretionary spending limits—although the required cap reductions were superseded by four Bipartisan Budget Acts (2013, 2015, 2018 and 2019) that raised the caps.
The required reductions in mandatory spending in the defense and nondefense categories are achieved through a mandatory sequester (across-the-board cuts)—subject to numerous exemptions and special rules. OMB refers to the mandatory reductions as the “Joint Committee sequester.”
OMB is required to explain any differences between their binding calculations and the nonbinding calculations by CBO.
Implementing Joint Committee Discretionary Reductions: The BCA required the Joint Committee automatic reductions in discretionary spending to be implemented in FY 2013 by sequestration; and in subsequent years by automatic reductions in the discretionary spending caps. (This was largely a function of timing. The reductions in FY 2013 were to take effect after the fiscal year had begun, while the reductions for subsequent years were to be calculated by OMB prior to the budget year.)
The automatic spending cap reductions, however, were largely superseded by subsequent legislation—the Bipartisan Budget Acts.
ATRA and BBAs Rollback Spending Cap Reductions, Extend Mandatory Sequester
When Congress missed the January 15, 2012 deadline to enact deficit reduction of $1.2 trillion over 10 years, the BCA triggered automatic spending reductions of $109.3 billion in each fiscal year from FY2013 through FY2021. Subsequent revisions to the Joint Committee reductions can be summed up as follows:
FY2013 sequester was reduced from $109 billion to $85 billion and postponed for two months by the American Taxpayer Relief Act (ATRA; P.L. 113-67) due to concerns about its economic impact;
Annual discretionary cap reductions for FY 2014 through FY 2021 were partially or fully overturned by cap revisions enacted in four “Bipartisan Budget Acts,” each of which increased the discretionary caps for sequential two-year periods (FY2014-15, FY2016-17, FY2018-19, and FY2020-21); and
Joint Committee sequestration of mandatory spending has been fully implemented each fiscal year, and extended through FY2031.
American Taxpayer Relief Act Reduces FY2013 Sequester: The American Taxpayer Relief Act (ATRA), signed into law on January 2, 2013, made adjustments to the BCA in response to concerns about the economic consequences of an impending “fiscal cliff.” The fiscal cliff referred to nearly simultaneous tax increases and spending reductions that were to occur at the beginning of calendar year 2013. The Congressional Budget Office estimated the automatic tax increases and spending cuts may have pushed the economy into recession.
The tax increases were due to occur in 2013 because of various tax cuts expiring at the end of 2012, along with expiration of tax incentives that were enacted in response to the recession. At about the same time, automatic spending reductions of $109.3 billion per year, triggered by the BCA’s Joint Committee process, were due to begin with a sequester on January 2, 2013.
In response to these fiscal policy concerns, ATRA extended certain expiring tax cuts, while reducing and postponing the scheduled BCA sequester. Title IX of ATRA reduced the FY2013 sequester by $24 billion, from $109.3 billion down to $85.3 billion (still equally divided between defense and nondefense), and postponed the effective date of the BCA sequester from January 2, 2013 until March 1, 2013.
Bipartisan Budget Act of 2013 Raised Caps, Extended Sequester: The Bipartisan Budget Act of 2013 (BBA-13; P.L. 113-67), often referred to as the “Murray-Ryan agreement,” increased discretionary spending limits for the defense and nondefense categories by $22 billion for FY2014 and $9 billion for FY2015 (rounded).
BBA-13 also extended the mandatory spending sequester—beyond its statutory expiration date of FY2021—by two years. The extension through FY2023 was intended to offset the costs of raising the discretionary spending caps.
Bipartisan Budget Act of 2015 Raised Caps, Extended Sequester: As reflected below, the Bipartisan Budget Act of 2015 (BBA-15; P.L. 114-74), enacted November 2, 2015, increased discretionary spending limits for the defense and nondefense categories, each by $25 billion for FY2016, and by $15 billion for FY 2017; the new levels were above the sequester caps but below the original BCA caps. Congress offset the increased spending by: extending the mandatory sequester by one year through FY2025, drawing down strategic petroleum reserves, and other provisions.
The bill also established nonbinding spending targets for Overseas Contingency Operations-Global War on Terrorism (OCO/GWOT) levels for FY2016 and FY2017; amended the limits on adjustments for Program Integrity Initiatives; and temporarily suspended the debt limit through March 15, 2017, followed by an adjustment for amount borrowed.
Bipartisan Budget Act of 2018 Raised Caps, Extended Sequester: The Bipartisan Budget Act of 2018 (BBA-18; P.L. 115-123), enacted February 9, 2018, increased the defense and nondefense discretionary caps for FY 2018 and FY 2019 to levels above the original BCA caps, as reflected in the table below.
For FY2018, the defense cap was increased by $80 billion and the nondefense cap by $63 billion; and for FY2019, the defense cap was increased by $85 billion and the nondefense cap by $68 billion. The resulting caps were higher than the original BCA caps, but remained below the pre-BCA discretionary baseline.
BBA-18 also extended the mandatory spending sequester by two years, through FY2027 as an offset for the costs of increasing the caps, in addition to extension of certain fees, a drawdown of the Strategic Petroleum Reserve, and other provisions.
BBA-18 also suspended the debt limit through March 1, 2019, providing for the limit to be increased following the suspension period to accommodate obligations issued during the suspension period.
Bipartisan Budget Act of 2019 Raised Caps, Extended Sequester: The Bipartisan Budget Act of 2019 (BBA-19; P.L. 116-37), enacted August 2, 2019, increased the defense and nondefense discretionary caps for FY2020 and FY2021 to levels above the original BCA caps, as reflected below.
For FY2020, the defense cap was increased by $90.3 billion and the nondefense cap by $78.3 billion; and for FY2021, the defense cap was increased by $82.5 billion and the nondefense cap by $68.5 billion. The resulting caps were higher than the original BCA caps, but remained below the pre-BCA discretionary baseline.[16]
BBA-19 extended the mandatory spending sequester by two years, through FY2029, as an offset for the costs of increasing the caps, along with extending certain customs user fees through FY2029.
Fiscal Responsibility Act of 2023
In 2023, the President and Congress faced a political impasse over the debt ceiling—not unlike the debt standoff in 2011 that produced the Budget Control Act. On January 13, 2023 Secretary of the Treasury Yellen informed Congress that the outstanding debt of the United States would reach the statutory limit later that month. As in the past, the Treasury then invoked “extraordinary measures” to make cash available temporarily to fulfill government obligations, eventually extending the government’s potential default date to June 5, 2023.
After a political impasse of several months—with President Biden insisting on a “clean” debt limit suspension (i.e., without conditions) and House Speaker Kevin McCarthy seeking to condition a debt suspension on 10 years of enforceable spending caps and repeal of numerous Administration priorities—the President and the Speaker and their principal advisors entered into serious negotiations in May of 2023. Several weeks of intensive negotiations led to enactment of the “Fiscal Responsibility Act of 2023” (“FRA,” H.R. 3746) which was signed into law on June 3, 2023, and includes the key provisions:
The Fiscal Responsibility Act (“FRA”) suspended the debt limit through January 1, 2025, and on January 2, 2025 the debt limit will be re-set at the amount of debt outstanding at that time.
Section 101 of the FRA established defense and non-defense discretionary spending caps for FY 2024 and FY 2025 enforced by budget sequestration and points of order. The defense caps permitted a 3.3% increase in budget authority in FY 2024 and a 1% increase in FY 2025, but also allowed for emergency spending outside the caps. On the nondefense side, while the nondefense discretionary (NDD) caps on their face called for a significant reduction in NDD spending, a $69 billion “side deal” was reached at the time of enactment to allow total NDD spending for FY 2024 to roughly match total FY 2023 levels for NDD—i.e., a “hard freeze” with no increase for inflation or population growth. The side agreement consisted of “CHIMPs,” which enable additional spending within the caps, emergency spending outside the caps, and tapping IRS and Commerce Department mandatory spending accounts for additional NDD spending. The “side deal” was subsequently renegotiated by the Johnson-Schumer Agreement of January 7, 2024.
The FRA includes an action-forcing mechanism to incentivize completion of all 12 appropriation bills for fiscal years 2024 and 2025. Section 102 of the Act requires that, on January 1 of the applicable fiscal year (2024 or 2025), if a continuing resolution remains in effect, the caps established in section 101 are to be changed to levels one percent below FY 2023 base levels. This “technically” occurred on January 1, 2024 because none of the 12 FY 2024 appropriation bills had been enacted. However, the adjusted levels were not enforceable by an OMB sequester until April 30 and, then, only if a continuing resolution remained in effect for any discretionary spending programs for that fiscal year. Because all 12 appropriation bills were completed in March of 2024, the adjusted caps reverted back to the FRA § 101 statutory levels.
For additional background on spending caps, including tables displaying all of the cap levels, see TRILLIONS: A Primer on Federal Spending, Taxes, the U.S. Debt Ceiling, and Fiscal Law.