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 by investors’ 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.”
