Following months of deadlock, President Joe Biden and Republican leader Kevin McCarthy have tentatively agreed on a plan to increase the United States debt ceiling, averting a potential default.
Sources familiar with the negotiations revealed that the White House and House Republican negotiators have reached an agreement in principle, marking a breakthrough in the ongoing impasse. While some minor matters remain to be addressed, the deal has gained enough traction to move forward.
To prevent economic instability, it is crucial for the deal to pass through Congress before the Treasury Department faces a shortage of funds to fulfil its obligations. Failure to raise the debt ceiling by June 5 could have severe consequences.
Republican control of the House of Representatives has resulted in demands for significant spending cuts and additional conditions, such as work requirements for certain benefit programs and reduced funding for the Internal Revenue Service.
Specific details of the final agreement are not immediately available. However, earlier reports indicated that negotiators had agreed to cap non-defence discretionary spending at 2023 levels for a period of two years in exchange for an increase in the debt ceiling over a similar timeframe. The delicate task at hand involves finding a compromise that can secure the necessary votes in both the House and Senate, given their narrow majorities.
The prolonged stalemate has generated concern in financial markets, negatively impacting stocks and leading to record-high interest rates for some bond sales. Economists warn that a default would have far-reaching consequences, potentially triggering a recession, destabilising the global economy, and causing a surge in unemployment.
Initially, President Biden refused to engage in negotiations with McCarthy regarding future spending cuts, demanding a “clean” debt-ceiling increase without additional conditions. He also called for the presentation of a 2024 budget proposal to address his concerns. However, negotiations between Biden and McCarthy gained momentum on May 16.
Democrats criticised Republicans for jeopardising the economy with their brinkmanship tactics, while Republicans argued that increased government spending was fueling the country’s growing debt, which now matches the annual output of the economy. The United States came perilously close to defaulting on its debt in 2011, resulting in significant shocks to the economy, including a credit rating downgrade and a major stock market sell-off.
While the tentative agreement represents progress, there are further challenges ahead. McCarthy has pledged to provide House members with a 72-hour period to review the legislation before bringing it to a vote. The outcome will test the level of support for the compromises within the bill, as both hard-right Republicans and progressive Democrats may express opposition.
Additionally, the bill will need to pass the Senate, requiring at least nine Republican votes to succeed. The legislative process allows for multiple opportunities to impede progress in both chambers.