US President Joe Biden and Keven McCarthy, leader of the Republicans in Congress, reached an “agreement in principle” on Saturday May 27 to avoid default. As a result of political compromise, it removes the prospect of a catastrophe not only for the US economy, but also for the rest of the world.
President Joe Biden and Republican leader Kevin McCarthy announced a deal Saturday to raise the debt ceiling, dragging the United States back from the precipice of default with only a few days to spare.
Congress will vote on the deal to extend the government’s borrowing authority on Wednesday, just shy of the June 5 “X-date” when the Treasury estimates the government will no longer be able to pay its bills, plunging the world’s biggest economy into turmoil.
Raising the debt ceiling — a legal maneuver that takes place most years without drama — allows the government to keep borrowing money and remain solvent.
This year, Republicans demanded deep spending cuts — largely in social spending for the poor — in return for raising the debt ceiling, saying the time had come for bitter medicine to address the country’s mammoth $31 trillion debt.
Biden argued that he would not negotiate over spending issues as a condition for raising the debt ceiling, accusing the Republicans of taking the economy hostage.
Both sides have now somewhat climbed down.
According to a source familiar with the negotiations, the deal includes freeing up the debt ceiling for two years, meaning there will be no need for negotiations in 2024, when the presidential election will be in full swing.
The big cuts Republicans wanted are not there, though non-defence spending will remain effectively flat next year, and only rise nominally in 2025, the source said.
There will also be new rules for accessing certain federal assistance programs, though the source said the deal protected Biden’s signature Inflation Reduction Act and student debt relief plan.
McCarthy is hoping to bring the narrow House majority of 222 Republicans with him, but the deal is likely to face opposition from 35 far-right lawmakers who told him to “hold the line” against compromising on far more sweeping spending cuts. That means a large number of Democrats will have to be persuaded to vote with a reduced number of Republicans — something that rarely happens on big bills.
If a default occurs, the government wouldn’t miss loan repayments until mid-June but in the meantime it would likely have to halt $25 billion in social security checks and federal salaries.
When Barack Obama’s administration narrowly averted a default 12 years ago, a ratings downgrade cost taxpayers more than $1 billion in higher interest costs.
Malo Pinatel, with AFP
