U.S. President Joe Biden speaks to the media after disembarking from Marine One at the White House in Washington on May 28.JULIA NIKHINSON/Reuters
U.S. President Joe Biden finalized an agreement with Republican Party negotiators to raise the country’s debt ceiling on Sunday, a major breakthrough after months of political brinkmanship that has threatened to push the United States into default and upend global financial markets.
The deal between Mr. Biden and Republican House Speaker Kevin McCarthy would raise the US$31.4-trillion debt limit for two years while capping non-military discretionary spending by the federal government over that period.
The agreement still needs approval from both houses of Congress, and could face significant opposition, particularly from right-wing law makers who have pushed for steeper cuts in government spending and criticized the deal on Sunday. The House of Representatives, where the Republicans hold a narrow majority, is expected to vote on the deal on Wednesday.
The standoff over the country’s fiscal outlook has come down to the wire. Without the ability to borrow more money, the U.S. government could run out of cash as early as June 5, according to Treasury Secretary Janet Yellen. That would trigger an unprecedented default, sending shock waves through the world’s financial markets and potentially plunging the U.S. economy into a deep recession.
Both Mr. Biden and Mr. McCarthy spent Sunday hashing out the details of the agreement and urging their respective party members to fall in line behind the deal, as negotiators rushed to finalize a text of the bill for law makers to vote on.
“It takes the threat of catastrophic default off the table, [and] protects our hard earned and historic economic recovery,” Mr. Biden said in a Sunday evening press conference at the White House.
“And the agreement also represents a compromise. This means no one got everything they want. But that’s the responsibility of governing,” he said.
The U.S. debt ceiling has been raised dozens of times over the past century, often with little fanfare. This time around – as happened in 2011 and 2013 – Republican fiscal hawks have used the issue as leverage, saying they will only vote to raise the debt limit if the government cuts spending and introduces stricter criteria for some social programs.
Mr. Biden initially refused to negotiate, saying that Republicans were holding the country’s debt “hostage.” But this changed as the government careened toward the so-called “X-date,” after which it would be unable to meet its financial obligations. And after weeks of intense negotiation, Mr. Biden and Mr. McCarthy reached a deal during a 90-minute phone call on Saturday evening.
The deal would raise the debt limit until 2025, pushing the issue past the next presidential election. In return, nondefence discretionary spending would be capped near current levels for the next two years. The agreement also increases some work requirements for government food aid programs, and cuts money that had been assigned to the Internal Revenue Service to improve tax enforcement – two Republican demands.
While the discussion revolved around fiscal sustainability, neither side pushed for significant changes to the government’s most expensive programs, including Medicare and Social Security, whose cost is expected to balloon in the coming decades as the population ages.
The deal still faces hurdles on its way through Congress. Some hard-right Republican law makers, who are organized under the Freedom Caucus banner, panned the agreement on social media on Sunday and promised to oppose the vote. Some left-wing Democrats are also expected to vote against the deal, forcing its advocates to cobble together bipartisan support for the bill.
“The Speaker and I made clear from the start that the only way forward was a bipartisan agreement. That agreement now goes to the United States House and to the Senate. I strongly urge both chambers to pass that agreement,” Mr. Biden said Sunday evening.
Meanwhile Mr. McCarthy told Fox News on Sunday that 95 per cent of Republican legislators were on board with the deal.
“Maybe it doesn’t do everything for everyone. But this is a step in the right direction that no one thought we would be at today,” Mr. McCarthy said. “This is a good bill for the American public.”
The back-and-forth over the past few months has put financial markets on edge. U.S. government securities are the bedrock of global financial markets, and a failure by the U.S. government to honour its debts would push borrowing costs sharply higher around the world.
Economists and Wall Street analysts have warned that a default could tip the U.S. economy into a recession, at a time when the economic outlook is already darkening because of the sharp rise in interest rates and the failures of several U.S. banks in recent months.
Last week, Fitch Ratings Inc. put the United States’ AAA credit rating on a negative watch, suggesting that the country could be on course for its first downgrade since S&P Global Ratings downgraded its U.S. rating in 2011 during an earlier debt-ceiling standoff.