President Biden and House Speaker Kevin McCarthy on Saturday reached what the pair called a “agreement in principle” to increase the federal government’s borrowing limit and cut some spending, as they sought to ending a months-long standoff that has brought the government to the brink of defaulting on its credit for the first time.
The deal still has to pass Congress. Its failure could upend the global financial system, rocking markets from Tokyo to London, jeopardizing Medicare and Social Security payments and calling into question the United States’ role as the world’s most reliable economy.
McCarthy (R-Bakersfield) said he and Biden agreed to a two-year debt ceiling increase of $31.4 trillion, extending the country’s borrowing limit until after the presidential election in 2024. The White House has said it will agree to temporary spending caps on nondiscretionary funding, tougher work requirements on social safety net programs, and changes to accelerate energy and gas projects.
Biden and McCarthy will have to sell the compromise to their respective allies in Congress, an uphill battle of convincing far-right GOP members who wanted McCarthy to go further in extracting spending cuts and progressive Democrats who say that Biden gave in to right-wing demands.
McCarthy said he and Biden spoke twice on Saturday and “we still have a lot of work to do. But I think this is a tentative agreement worthy of the American people.”
The bill provides “historic spending cuts, back-to-back reforms that will lift people out of poverty and into the workforce,” the speaker said.
He said he expected the bill to be drafted and posted by Sunday, with a vote in the House on Wednesday.
Biden, in a statement late Saturday, called the deal “an important step forward that cuts spending while protecting essential programs for workers and growing the economy for everyone.”
He said the agreement protected his legislative achievements, but acknowledged that it “represents a compromise, which means that not everyone gets what they want”. He urged Congress to approve it quickly to avoid a “catastrophic default”.
A source close to the pact said the new work requirements for safety net programs are limited, sparing Medicaid, for example. But they include new work requirements for people who receive SNAP benefits, known as food stamps. The source, speaking on condition of anonymity because she was not authorized to discuss the deal publicly, said the deal did not reduce spending approved last year under the law on curbing inflation, Biden’s flagship climate legislation.
House Republicans demanded sweeping spending cuts in return for raising the debt ceiling. The White House first insisted that the once superficial practice of raising the borrowing limit should be considered separately from budget talks because it allows the government to continue borrowing to pay the bills it already has. accumulated.
A compromise is a political risk for McCarthy, who secured the speaker’s gavel in January by empowering right-wing members of the House and striking a deal that allows a single vote to oust him as speaker. Achieving a brokered deal with Biden could avert an unprecedented default, but could also cost the California Republican his leadership job.
Several members of the far-right Republican faction expressed frustration that McCarthy watered down a GOP debt limit bill passed in April that included deep spending cuts, clawed back billions of dollars from funding for the Internal Revenue Service and unspent money for COVID-19, and repealed parts of the White House climate program.
McCarthy and the White House will need dozens of Democrats to support the bipartisan plan in order to pass it in the tightly divided House. The Democratic-controlled House and Senate must pass a bill by June 5, when the Treasury Department predicts the government will run out of money to pay its bills.
A default could trigger economic chaos that could potentially ripple through global financial markets and devastate millions of Americans. The White House has warned it will disrupt payments to Social Security recipients, government employees and the military.
A default would almost certainly precipitate the already fragile US economy into a recession and risk doing irreparable long-term damage to the credibility and safety of the US dollar, the reserve currency that anchors the global financial system.
The United States has trillions of dollars in outstanding debt, and non-payment of interest on its bonds would shock stock markets and sharply increase the cost of borrowing to finance Washington’s deficit spending, which would ultimately ripple through on businesses and consumers.
The threat of a default has put Wall Street on edge – stocks have trended lower in recent days – but the damage has been mitigated by investors expecting that even the toughest partisan politics wouldn’t dare allow a violation of the debt ceiling. They knew that if there was a default, “there was no way to hide,” said Ryan Sweet, chief US economist at Oxford Economics.
“Up and down the income and wealth spectrum, that would be an economic disaster,” Sweet said.
On Wednesday, rating agency Fitch put the United States’ AAA rating on negative, warning of a potential downgrade if lawmakers failed to reach an agreement. The agency said “under control of the debt ceiling” threatened the US rating – the highest available – but it expected a resolution before the scheduled June 5 deadline.
The government narrowly avoided default under President Obama in 2011, but Standard & Poor’s downgraded the US credit rating following the fiscal showdown.
Progressive Democrats cited the 2011 debt crisis as an example of how GOP lawmakers used the debt ceiling as a means to obtain political concessions, noting that Republicans lifted the borrowing limit of the country three times under former President Trump with no problem.
Some progressive lawmakers have pushed Biden to invoke the 14th Amendment, which states that “the validity of public debt, authorized by law … shall not be questioned.”
Biden said he believed he had the power to use the amendment to bypass Congress and allow more debt to be issued, but acknowledged that decision would be challenged in court.
Earlier this month, the president canceled a high-profile trip to Australia and Papua New Guinea following the Group of 7 summit in Japan, returning early to Washington to meet with McCarthy. The pair failed to make any immediate progress, and negotiators continued to haggle over Memorial Day weekend, telling members of Congress to be prepared to return to Washington to vote on a bipartisan bill. before the deadline.
“The American people deserve to know that their Social Security payments will be there, that veterans hospitals will remain open and that economic progress will be made and we will continue to do so,” Biden said Thursday during a ceremony at the Rose Garden. announce General Charles Q. Brown Jr. as its next chairman of the Joint Chiefs of Staff.
“The default puts all of that at risk,” he said. “The leaders of Congress understand this, and they all agree: there will be no default.”
This story originally appeared in the Los Angeles Times.