President Biden and House Speaker Kevin McCarthy reached what both men called an “agreement in principle” on Saturday to raise the federal government's borrowing limit and cut some spending, as they sought to end a months-long stalemate that brought the government to the brink of defaulting on its credit for the first time.
The deal must still pass Congress. Its failure could upend the global financial system, jarring 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 that he and Biden had agreed to a
two-year increase on the $31.4-trillion debt ceiling, extending the nation's
borrowing limit until after the 2024 presidential election. The White House
said it would accept temporary spending caps on nondiscretionary funding,
tougher work requirements on social safety net programs and permitting
changes to speed up energy and gas projects.
Biden and McCarthy
will need to sell the compromise to their respective allies in Congress, an
uphill battle that includes convincing far-right GOP members who wanted
McCarthy to go further in extracting spending cuts and progressive Democrats
who say Biden caved to right-wing demands.
McCarthy said that he
and Biden had spoken twice on Saturday and that "we still have a lot of work
to do. But I believe this is an agreement in principle that's worthy of the
American people."
The bill has "historic reductions in spending, consequential
reforms that will lift people out of poverty into the workforce," the
speaker said.
He said he expected that the bill would be written
and posted by Sunday, with a House vote on Wednesday.
Biden, in a
statement late Saturday, called the agreement "an important step forward
that reduces spending while protecting critical programs for working people
and growing the economy for everyone."
He said that the agreement
protects his signature legislative accomplishments but conceded that it
"represents a compromise, which means not everyone gets what they want." He
urged Congress to approve it quickly to avoid "catastrophic default."
A source familiar with the pact said the new work requirements
for safety net programs are limited, sparing Medicaid, for example. But they
do include some new work requirements for people who receive SNAP benefits,
known as food stamps. The source, speaking on condition of anonymity because
they weren't authorized to discuss the deal publicly, said the agreement
does not curtail spending approved last year as part of the Inflation
Reduction Act, Biden's signature climate legislation.
House Republicans demanded sweeping spending cuts in exchange for
raising the debt ceiling. The White House initially insisted that the
once-perfunctory practice of raising the borrowing limit should be
considered separately from the budget talks, since it allows the government
to continue borrowing to pay bills it has already accrued.
A compromise is a political risk for McCarthy, who secured the
speaker's gavel in January by empowering right-wing House members and
striking a deal that allows a single vote to oust him as speaker. Passing a
brokered deal with Biden could avert an unprecedented default, but could
also cost the California Republican his leadership post.
Several
members of the Republicans' hard-right faction have expressed frustration
that McCarthy diluted a GOP debt limit bill passed in April that featured
deep spending cuts, clawed back billions of dollars in funding for the
Internal Revenue Service and unspent COVID-19 money, and repealed parts of
the White House climate agenda.
McCarthy and the White House will
need dozens of Democrats to back the bipartisan plan in order to pass it in
the narrowly divided House. Both the House and the Democratic-controlled
Senate need to pass a bill by June 5, when the Treasury Department projects
the government will run out of cash to pay its bills.
A default could trigger economic chaos that could potentially
cascade across global financial markets and devastate millions of Americans.
The White House has warned it would disrupt payments to Social Security
beneficiaries, government employees and members of the military.
A
default would almost certainly knock the already fragile American economy
into a recession and risk causing irreparable long-term damage to the
credibility and safety of the U.S. dollar, the reserve currency that anchors
the global financial system.
The U.S. has trillions of dollars in
outstanding debt, and missing interest payments on its obligations would
shock stock markets and sharply raise the cost of borrowing to finance
Washington’s deficit spending, ultimately rippling through businesses and
consumers.
The threat of a default has had Wall Street on edge — stocks
have been trending lower in recent days — but the damage was mitigated
byinvestors' expectation that even die-hard partisan politics wouldn’t dare
allow a breach to the debt ceiling. They knew that if there's a default,
“there’s no way to hide,” said Ryan Sweet, chief U.S. economist at Oxford
Economics.
"Up and down the income and wealth spectrum, it would
be an economic catastrophe,” Sweet said.
On Wednesday, credit
rating agency Fitch placed the United States' AAA rating on negative,
warning of a potential downgrade if lawmakers fail to pass a deal. The
agency said that "brinkmanship over the debt ceiling" threatened the U.S.
rating — the highest available — but it expected a resolution before the
projected June 5 deadline.
The government narrowly averted a default under President Obama
in 2011, but Standard & Poor's downgraded the U.S. credit rating as a
result of that fiscal showdown.
Progressive Democrats have
pointed to the 2011 debt crisis as an example of how GOP lawmakers have used
the debt ceiling as a means of extracting policy concessions, noting that
Republicans lifted the nation's borrowing limit three times under former
President Trump without issue.
Some progressive lawmakers have
pushed Biden to invoke the 14th Amendment, which says the "validity of the
public debt, authorized by law ... shall not be questioned."
Biden
has said he believes he has the authority to use the amendment to bypass
Congress and allow for more debt to be issued, but acknowledged that move
would be challenged in courts.
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 to Washington early to meet with McCarthy. The two men failed to
make any immediate progress and negotiators continued haggling into Memorial
Day weekend, telling congressional members to be ready to return to
Washington to vote on a bipartisan bill ahead of the deadline.
"The
American people deserve to know that their Social Security payments will be
there, that veterans hospitals remain open, and that economic progress will
be made and we’re going to continue to make it," Biden said Thursday during
a Rose Garden ceremony to announce Gen. Charles Q. Brown Jr. as his next
chairman of the Joint Chiefs of Staff.
"Default puts all that at
risk," he said. "Congressional leaders understand that, and they’ve all
agreed: There will be no default."
