In a significant breakthrough, President Joe Biden and top Republican leader Kevin McCarthy have agreed on a deal to raise the debt ceiling, averting a potential default by the United States. The agreement comes after a protracted standoff between the two sides, with both playing hardball in the final race to strike a deal before the critical June 5 deadline.
The deal, announced on Saturday, will be put to a vote in Congress on Wednesday, just a few days before the Treasury estimated that the government would no longer be able to meet its financial obligations. This would have led to a severe economic turmoil in the world’s largest economy.
“After weeks of negotiations, we have come to an agreement in principle,” stated McCarthy, the speaker of the Republican-held House of Representatives. McCarthy further revealed that he spoke with President Biden on Saturday to finalize the deal, and he plans to consult with him again on Sunday to oversee the final drafting of the bill. McCarthy acknowledged that there is still work to be done to secure Congress’s backing for the agreement.
Raising the debt ceiling, a routine legal procedure, enables the government to continue borrowing money and maintain its financial solvency. However, this year, Republicans demanded significant spending cuts, particularly in social programs for the underprivileged, in exchange for raising the debt ceiling. They argued that the nation’s massive $31 trillion debt necessitated tough measures.
In response, President Biden emphasized that he would not negotiate over spending issues as a precondition for raising the debt ceiling, accusing Republicans of holding the economy hostage. Biden stated that the agreement was good news for the American people as it prevented a catastrophic default that could have led to an economic recession, devastation of retirement accounts, and the loss of millions of jobs.
Reports suggest that the outline of the deal includes a two-year extension of the debt ceiling, eliminating the need for negotiations in 2024 during the presidential election period. While the substantial spending cuts demanded by Republicans are not included, there will be a freeze on the budget. Additionally, the agreement introduces stricter rules for accessing unemployment benefits and other federal assistance.
President Biden acknowledged that the deal represents a compromise, meaning not everyone gets everything they want. He emphasized that compromise is an inherent part of governing.
Treasury Secretary Janet Yellen had initially warned of a possible default around June 1 if the debt ceiling was not raised, but she extended the deadline to June 5, providing lawmakers with some breathing room. However, the legislation will still need to pass through Congress at a faster pace than usual.
McCarthy aims to secure the support of the House majority of 222 Republicans, but he may face opposition from 35 far-right lawmakers who advocate holding the line against compromising on spending cuts. Therefore, a significant number of Democrats would need to be convinced to vote alongside a reduced number of Republicans, which is rare for major bills.
The Democrats themselves may face resistance from the left wing of the party, which opposes any spending restrictions.
Lawmakers will be called back from an extended holiday weekend to vote on the agreement. Failure to reach a resolution could result in the government missing loan repayments by mid-June, leading to potential halts in social security checks and federal salaries totaling $25 billion.
The major ratings agencies, including Morningstar and Fitch, have closely monitored the situation, warning that they may downgrade the country’s credit rating even if a crisis is averted. Similar circumstances occurred twelve years ago when the Obama administration narrowly avoided a default, resulting in more than $1 billion in higher interest costs for taxpayers.
As Congress reconvenes to vote on the agreement, the fate of the debt ceiling and the stability of the US economy hang in the balance.
