Flat caps, rising subscriptions: how the debt deal squeezed federal IT from the inside
The Fiscal Responsibility Act held nondefense spending roughly flat for two years. Federal IT budgets did not shrink evenly. Subscriptions and cloud bills grew on their own, modernization was deferred by default, and technical staff thinned through attrition. Each needed its own control.
Looking Back revisits one week at a time, from January 2020 to today, and asks what it meant for the banks, health systems and public agencies we serve. The series was written in 2026, with the benefit of hindsight, and each article says which week it looks back on.
The week
Over the Memorial Day weekend, President Biden and House Speaker Kevin McCarthy reached an agreement to raise the federal debt limit. The House passed the Fiscal Responsibility Act on May 31, 2023, the Senate on June 1, and the president signed it on June 3, days before the date the Treasury had said it could run out of cash. The law suspended the debt limit until January 2025. It set caps on discretionary spending for fiscal years 2024 and 2025, holding nondefense spending roughly flat in the first year with a small increase in the second. It included a mechanism to discourage long continuing resolutions by lowering the caps if full-year appropriations were not enacted. It also rescinded some unspent COVID-19 relief funds and part of the additional IRS funding provided in 2022.
For agency technology leaders, the deal mattered less for the headline than for what it implied about the next two budgets. Nondefense spending would be roughly flat in nominal terms while inflation was still well above the Federal Reserve’s target, which meant a real decline. Under a flat budget, technology spending does not shrink evenly. It sorts itself by how each line behaves. Some costs grow on their own. Some investments can be postponed, so they are. Some capacity erodes without anyone deciding it should. Each behavior calls for a different control, and together they account for the whole IT budget.
Costs that grow on their own
A decade earlier, much federal IT spending bought hardware and perpetual licenses, followed by fairly stable maintenance. By 2023 a larger share went to cloud services and software subscriptions. Those bills recur every year and rise with use. Storage accumulates. Compute expands with new workloads. Per-user licenses follow headcount and new features. Renewals arrive with price increases. Security spending added its own growth. Logging requirements under OMB’s 2021 memorandum M-21-31 raised the volume of data agencies had to collect and retain, and storage and analysis tools were often priced by volume.
Under a flat budget, every dollar of automatic growth comes out of something else. The discipline usually called FinOps addresses this. Tag cloud resources to the programs that use them and show each program its costs. Set budgets and alerts. Rightsize instances and move old data to cheaper storage tiers. Use committed-use discounts where demand is predictable, accepting less flexibility in return. Reconcile software licenses against actual use before each renewal.
Federal appropriations law adds a constraint. Agencies generally cannot commit funds beyond what has been appropriated. Multi-year discounts therefore have to be structured as options or within available funding, and that limits some savings commercial buyers take for granted. Contract terms can still help. Caps on renewal price increases, notice of consumption spikes and the right to reduce seat counts at each anniversary are all negotiable.
A single metric shows the pressure. Compare the growth rate of run costs with the growth rate of the IT budget. The gap is the amount modernization loses each year if nothing changes.
Investments that get deferred
Modernization projects run for years. Replacing a legacy financial system, case management platform or benefits system can take five years or more. Under flat caps they become the residual: what is left after run costs and mission priorities are paid. Continuing resolutions make it worse. They typically fund agencies at prior-year rates and restrict new starts, which can delay awards and stall work already planned.
Modernization also carries a cost that plans often understate. During migration, old and new systems run side by side, so run costs rise before they fall. If the old system is never fully decommissioned, the savings never arrive. Treating decommissioning as a funded deliverable with a date, rather than an assumption, is one of the more reliable ways to protect a modernization budget.
Agencies had some tools. The Technology Modernization Fund provided funding for projects, usually with repayment expectations. IT working capital funds authorized by the 2017 Modernizing Government Technology Act let some agencies carry money across years. Modular contracts that deliver usable capability in each phase reduce the damage when funding pauses. A modernization plan that assumed steady annual increases was fragile. A sturdier plan named the phases that could proceed on flat funding and defined a usable stopping point if the money ran short.
Capacity that erodes by attrition
The third behavior concerns people. Flat budgets slow hiring, and federal technology talent was already hard to recruit against private-sector pay. Staff numbers then fall through attrition, without a decision. The gap is filled by contractors, or by nobody. Attrition also falls unevenly. One vacancy in a two-person cost management team halves its capacity, while the same vacancy in a large service desk barely registers.
The roles most at risk are the ones that control the other two categories. Cloud cost management needs analysts who understand both billing and architecture. Holding contractors accountable needs technical staff who can judge their work. Losing those people saves salary and raises run costs and project risk later. A more durable approach protects a small core of government staff in architecture, security, cost management and contract oversight, and uses contractors for delivery capacity.
These three behaviors interact, which is why they belong in one review. The Federal Information Technology Acquisition Reform Act already gave CIOs a role in agency IT budgets. A joint CIO and CFO review of growing costs, deferred investments and staffing, held at least annually, makes the trade-offs explicit. State and local agencies faced a parallel version. Many technology projects funded with one-time federal pandemic relief money created recurring subscription costs. Those costs would fall on general funds once the relief money had to be obligated, by the end of 2024, and spent.
With hindsight
The caps held in broad terms, though final fiscal 2024 appropriations were not enacted until March 2024, after several continuing resolutions, and fiscal 2025 ran largely on a full-year continuing resolution. In 2025 the new administration canceled or cut many federal contracts, including technology consulting work, and reduced the federal workforce substantially. The government shutdown that autumn was the longest on record. GSA also began negotiating governmentwide software pricing under a OneGov approach, which addressed renewal costs directly. Together these made budget uncertainty, not just flat budgets, the defining feature of federal IT finance. The attrition category proved the most acute. Agencies that lost technical staff found it harder to manage cloud costs and to oversee the contractors they still relied on. Run-cost management remains the part of the budget agencies control most directly.