Republicans, Biden reach debt ceiling deal
WASHINGTON - President Joe Biden and Republican leader Kevin McCarthy announced a deal Saturday to raise the debt ceiling, dragging the United States back from the precipice of default with only a few days to spare. Congress will vote on the deal to extend the government’s borrowing authority on Wednesday, just shy of the 5 June “X-date” when the Treasury estimates the government will no longer be able to pay its bills, plunging the world’s biggest economy into turmoil.
Biden said in a statement that the deal was “good news for the American people, because it prevents what could have been a catastrophic default and would have led to an economic recession, retirement accounts devastated, and millions of jobs lost.” McCarthy, who spoke with Biden to close the deal, said there was still “a lot of work to do, but I believe this is an agreement in principle that’s worthy of the American people.” The Republican speaker added that he was to consult again with the president yesterday and oversee final drafting of the bill, and the House would “then be voting on it on Wednesday.”
Raising the debt ceiling – a legal manoeuvre which takes place most years without drama – allows the government to keep borrowing money and remain solvent. This year, Republicans demanded deep spending cuts – largely in social spending for the poor – in return for raising the debt ceiling, saying the time had come for bitter medicine to address the country’s mammoth US$31 trillion debt.
Biden argued that he would not negotiate over spending issues as a condition for raising the debt ceiling, accusing the Republicans of taking the economy hostage. Both sides have now somewhat climbed down.
According to a source familiar with the negotiations, the deal includes freeing up the debt ceiling for two years, meaning there will be no need for negotiations in 2024 when the presidential election will be in full swing. The big cuts Republicans wanted are not there, though non-defence spending will remain effectively flat next year, and only rise nominally in 2025, the source said.
There will also be new rules for accessing certain federal assistance programmes, though the source said the deal protected Biden’s signature Inflation Reduction Act and student debt relief plan. Biden said “the agreement represents a compromise, which means not everyone gets what they want. That’s the responsibility of governing.”
Treasury Secretary Janet Yellen had initially warned of a possible default around 1 June if Congress failed to raise the ceiling on borrowing, but gave lawmakers some breathing room on Friday when she updated the deadline to 5 June. Even so, the legislation will still have to clear Congress much more quickly than the normal timetable for even the most uncontroversial bills.
If a default occurs, the government wouldn’t miss loan repayments until midJune, but in the meantime it would likely have to halt US$25 billion in social security checks and federal salaries. The battle has been monitored closely by the major ratings agencies, with Morningstar and Fitch both warning that they could opt for a downgrade, even if the crisis is averted.
When Barack Obama’s administration narrowly averted a default 12 years ago, a ratings downgrade cost taxpayers more than US$1 billion in higher interest costs.