What Impact Will the Debt-Ceiling Deal Have on Breakthrough Science?
President Joe Biden signed the Fiscal Responsibility Act of 2023 (FRA) last week, staving off a U.S. government default. The legislation extends the debt limit into early 2025, makes modest work requirement changes to the Supplemental Nutrition Assistance Program, and rescinds funds for the Internal Revenue Service meant to reduce tax fraud, but the most critical element of the bill places new caps on discretionary spending. I expect these new caps will only have a modest impact on breakthrough science startups that are transforming industries like energy, transportation, infrastructure, manufacturing, agriculture, and human augmentation.
Here is a basic summary of how the FRA will impact research and development and several key sectors that Prime Movers Lab invests. Also, be sure to read my previous post about the debt-ceiling negotiations to see how my predictions panned out.
Department of Defense Will Play an Even Bigger Role in R&D
The bill caps discretionary spending for FY2024 at $1.59 trillion ($886 billion for defense and $704 billion for nondefense) and limits FY2025 to a 1% increase. This represents an overall cut of $12 billion for FY2024 (simple math: defense spending will increase by $28 billion and nondefense spending will be reduced by $40 billion next year).
What does this mean for breakthrough science startups? In the coming years, I expect to see more federal R&D shift to the Department of Defense. The DoD has long been the largest recipient of R&D funding (currently about 40%). As funding at the Department of Health and Human Services for vaccine research and development declines in future years and new caps on non-defense spending come into place, I expect the DoD to get a bigger slice of the R&D pie. This could mean a greater focus on breakthroughs in cutting-edge communication systems (satellites), hypersonic aircraft, weapons for drone defense, quantum computing, and semiconductors.
While R&D funding at the Department of Energy, National Science Foundation, etc. will become more competitive, I believe bipartisan priorities like fusion energy, advanced manufacturing, and materials research that drive American competitiveness will continue to be well-funded even if they don’t reach the levels authorized in the CHIPS and Science Act.
Discretionary Spending Caps Limit Potential of CHIPS and Science Act
As mentioned, appropriations will likely fall well behind the targets authorized in last year’s CHIPS and Science Act. While this is unfortunate, it shouldn’t shock anyone. I believe this would have happened anyway given the GOP majority in the House. In fact, R&D totals even in Biden’s FY24 budget request were well below the authorized levels outlined in CHIPS (read more about the delta in this great piece by Federation of American Scientists’ Matt Hourihan and his colleagues). While the true potential of CHIPS is starting to fade, it’s important to remember that many of the semiconductor incentives in CHIPS have already been appropriated. The most important provision in CHIPS was the $52.7 billion in emergency supplemental appropriations for advancing the nation’s semiconductor manufacturing capabilities. That funding is already having a significant impact as companies like Intel, Micron, and portfolio company Halo Industries look to scale production.
Cleantech Incentives Escaped Unscathed
As previously predicted, tax incentives in the Inflation Reduction Act were left alone, including investment and production tax credits as well as the 45Q changes for carbon oxide sequestration. Eliminating tax cuts that were passed less than a year ago (which are already creating jobs across the country, including in Republican districts) proved too unpopular to be included in the final debt-ceiling package despite GOP attempts.
Removes One Dark Cloud Hanging Over Markets
Pushing the debt ceiling into 2025 provides some assurances to investors and startup founders that we won’t suffer a self-inflicted gunshot wound to the economy — at least not caused by the 118th Congress. The worst thing Congress could have done was pass a short-term increase. This would have created another unnecessary standoff at the end of the fiscal year or right in the middle of the presidential primaries next year. It would have been detrimental to public markets and cast a long shadow of uncertainty over venture capital and private equity.
NEPA Reform
The bill makes modest permitting reforms to the National Environmental Policy Act (NEPA) that could make deploying new infrastructure and energy projects easier. While not as comprehensive as the BUILDER Act introduced by Rep. Garret Graves (R-LA) earlier this year, the debt-ceiling bill consolidates the review process for multi-agency projects under a single agency to reduce duplicative work. It also establishes a two-year time limit on environmental impact statements and a one-year limit on environmental assessments. While two years may sound like a long time, it’s far faster than the status quo, which has allowed many projects to languish for 5–10 years before getting off the ground — if at all. It also expands “categorical exclusions” to exempt some projects that don’t affect the environment from the review process. In addition, the bill adds energy storage projects to the FAST-41 program to expedite the permitting process for these new infrastructure projects. Hopefully, these reforms will accelerate the construction of high-voltage transmission lines and transform America’s aging electric grid.
Bottom line: I honestly don’t see the FRA being much worse for the future of federal R&D and breakthrough science startups than natural budget negotiations would have been over the next decade. Discretionary funding cuts were inevitable. Had Biden and House Republicans battled over budget targets for the next two years, I don’t believe that the end result would have been demonstrably better. I’ve generally been pessimistic that Congress would fund priorities in CHIPS at their authorized levels. If anything, the FRA might actually move the budget and appropriations processes along, because all committees now have their budget targets. I believe we’ll see American competitiveness and technological innovation remain a top priority for years to come even if R&D funding shifts more to the DoD. Startups that are tackling the world’s biggest challenges will need to be more engaged with policymakers than ever before to ensure breakthrough science and innovation remain a priority in the shrinking discretionary budget in the years ahead.
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture.
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