After a week of intense negotiations, the White House and the Republican opposition appeared to be close to an agreement on the so-called debt ceiling on Friday.
Without an increase in this limit, the United States will no longer be able to meet all its debt obligations from June 1. Such technical bankruptcy (default), whereby the US government would become a temporary defaulter, could lead to economic damage worldwide.
The Republicans, who have regained control of the House of Representatives since January, are using the debt ceiling to force additional spending cuts from President Joe Biden and his Democrats. Until the beginning of this month, they refused to talk about such budget cuts.
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Because those talks also yielded little at first, fears of a debt crisis of their own making have increased in recent weeks. This is partly part of the negotiation game, in which parties flirt with economic disasters to get the other camp moving.
Impending downgrade
On the financial markets and stock exchanges, however, fears also grew this week that the politicians would use the so-called X date from June 1 to miss. On Wednesday evening, credit rating agency Fitch warned that it is therefore taking into account that the US is its highest AAA rating.ratings must take off. Such a downgrade of US creditworthiness could seriously disrupt the global financial system. On Thursday, more progress was made in the talks.
On Wednesday, Fitch said it should strip the US of its highest AAA rating
The Republicans initially set their sights high during the negotiations. They aimed at cutting back on Medicare and Medicaid social programs, withdrawing Biden’s pledge to cancel student debt and cutting $200 billion in “green” investments from Biden’s ambitious Inflation Reduction Act. The budget should also grow by only 1 percent each year.
The Republicans won little on these points, but they did force other Democratic concessions, with which they can present themselves as fiscally strict to their supporters.
Under the compromise that now appears to be in the works, all current budget expenditures (except Defense and social programs such as Medicare and Medicaid) will be kept the same in the next two budgets.
In exchange for freezing nondefense discretionary spending, the Republicans would be willing to raise the current ceiling ($31.4 trillion) by $3 to $4 trillion. This means that the limit would not have to be raised again until after the presidential elections at the end of 2024: a demand from the Democrats.
Other Republican gains, according to American media, concern stricter work requirements for benefit recipients, reclaiming unspent corona aid and not appointing tens of thousands of new tax inspectors. Incidentally, the latter commitment would on balance push up the budget deficit, because it hinders the fight against tax evasion.
Votes in Congress
While the rest of the country geared up for a long Memorial Day weekend on Friday, negotiators are said to be already working to encapsulate agreements in a bill.
Once an agreement is reached, the House and Senate will still have to adopt it. It is not yet a foregone conclusion that Biden and his main Republican opponent, House Speaker Kevin McCarthy, will get their respective parties on board.
The president is already facing criticism from progressive Democrats who believe he is giving in too much. And McCarthy received a letter yesterday from the far-right Freedom Caucus within his faction with additional demands. According to them, for example, stricter surveillance of the southern border with Mexico and the scrapping of the construction of an expensive new FBI headquarters should also be discussed.
Dissidents in both parties are likely to emerge against the deal, but with enough moderate votes it could still pass Congress. In the case of McCarthy, this could turn out to be risky, because the Freedom Caucus, at the beginning of this year, stipulated that the faction can send him away as ‘speaker’ in case of dissatisfaction.