diff --git a/data/transactions/logic/eval.go b/data/transactions/logic/eval.go
index 210d7a3164..8dcfdcfa04 100644
--- a/data/transactions/logic/eval.go
+++ b/data/transactions/logic/eval.go
@@ -1542,8 +1542,29 @@ func (cx *EvalContext) step() error {
 	}
 
 	if opcost > cx.remainingBudget() {
-		return fmt.Errorf("pc=%3d dynamic cost budget exceeded, executing %s: local program cost was %d",
-			cx.pc, spec.Name, cx.cost)
+		if cx.runMode != ModeApp {
+			return fmt.Errorf("pc=%3d dynamic cost budget exceeded, executing %s: local program cost was %d",
+				cx.pc, spec.Name, cx.cost)
+		}
+
+		requiredExtraBudget := uint64(opcost - cx.remainingBudget())
+		budgetPerMinFee := uint64(cx.Proto.MaxAppProgramCost)
+		requiredMinFees := (requiredExtraBudget + budgetPerMinFee - 1) / budgetPerMinFee
+		requiredFee := cx.Proto.MinTxnFee * requiredMinFees
+
+		if cx.FeeCredit == nil || *cx.FeeCredit < requiredFee {
+			return fmt.Errorf("pc=%3d dynamic cost budget exceeded, executing %s: local program cost was %d",
+				cx.pc, spec.Name, cx.cost)
+		}
+		*cx.FeeCredit -= requiredFee
+
+		*cx.pooledAllowedInners -= int(requiredMinFees)
+		if *cx.pooledAllowedInners < 0 {
+			return fmt.Errorf("pc=%3d dynamic group cost budget exceeded, executing %s: local program cost was %d",
+				cx.pc, spec.Name, cx.cost)
+		}
+
+		*cx.PooledApplicationBudget += int(budgetPerMinFee * requiredMinFees)
 	}
 
 	cx.cost += opcost
diff --git a/data/transactions/logic/evalAppTxn_test.go b/data/transactions/logic/evalAppTxn_test.go
index 9a6d0ebc41..9ed76985b7 100644
--- a/data/transactions/logic/evalAppTxn_test.go
+++ b/data/transactions/logic/evalAppTxn_test.go
@@ -1500,6 +1500,52 @@ itxn_submit;
 	TestApp(t, buy+buy+strings.Repeat(waste, 12)+"int 1", ep)
 }
 
+func TestInnerBudgetIncrementFromFee(t *testing.T) {
+	partitiontest.PartitionTest(t)
+	t.Parallel()
+
+	ep, tx, ledger := MakeSampleEnv()
+
+	waste := `global CurrentApplicationAddress; keccak256; pop;`
+
+	ledger.NewApp(tx.Receiver, 888, basics.AppParams{})
+	ledger.NewAccount(appAddr(888), 50_000)
+	tx.ForeignApps = []basics.AppIndex{basics.AppIndex(222)}
+
+	// For every variation ensure the following:
+	//
+	// 1. The opcode budget is increased, but not more than necessary
+	// 2. The fee credit is deducted
+
+	*ep.FeeCredit = 0
+	TestApp(t, strings.Repeat(waste, 5)+"int 1", ep)
+	require.IsIncreasing(t, []int{0, *ep.PooledApplicationBudget, ep.Proto.MaxAppProgramCost})
+	require.Equal(t, uint64(0), *ep.FeeCredit)
+	TestApp(t, strings.Repeat(waste, 6)+"int 1", ep, "dynamic cost budget exceeded")
+
+	*ep.FeeCredit = ep.Proto.MinTxnFee
+	TestApp(t, strings.Repeat(waste, 6)+"int 1", ep)
+	require.IsIncreasing(t, []int{0, *ep.PooledApplicationBudget, ep.Proto.MaxAppProgramCost})
+	require.Equal(t, uint64(0), *ep.FeeCredit)
+	TestApp(t, strings.Repeat(waste, 11)+"int 1", ep, "dynamic cost budget exceeded")
+
+	*ep.FeeCredit = ep.Proto.MinTxnFee * 2
+	TestApp(t, strings.Repeat(waste, 11)+"int 1", ep)
+	require.IsIncreasing(t, []int{0, *ep.PooledApplicationBudget, ep.Proto.MaxAppProgramCost})
+	require.Equal(t, uint64(0), *ep.FeeCredit)
+	TestApp(t, strings.Repeat(waste, 16)+"int 1", ep, "dynamic cost budget exceeded")
+
+	// Ensure that the fee credit isn't deducted more than necessary
+	*ep.FeeCredit = ep.Proto.MinTxnFee * 3
+	TestApp(t, strings.Repeat(waste, 11)+"int 1", ep)
+	require.IsIncreasing(t, []int{0, *ep.PooledApplicationBudget, ep.Proto.MaxAppProgramCost})
+	require.Equal(t, ep.Proto.MinTxnFee, *ep.FeeCredit)
+
+	// Ensure the group budget is still enforced
+	*ep.FeeCredit = ep.Proto.MinTxnFee * 257
+	TestApp(t, strings.Repeat(waste, 5*257)+"int 1", ep, "dynamic group cost budget exceeded")
+}
+
 func TestIncrementCheck(t *testing.T) {
 	partitiontest.PartitionTest(t)
 	t.Parallel()