You can almost exhale, because it’s expected that the U.S. will avoid a near default just a few days before they are expected to run short of cash.
Following months of tension, Joe Biden announced that he and Kevin McCarthy had reached an agreement on the principle for raising the debt limit. Before it becomes official, the contents of this deal will have to pass muster in Congress. It must be done quickly, since the Treasury Secretary Janet Yellen stated in a Friday letter to Congress that the government would not be able meet its financial legal obligations after June 5.
According to Sunday’s legislative text, the proposed plan called the “Fiscal Responsibilty Act of 2023”, would accomplish the following:
Two-year extension of the debt ceiling. The next time you’ll hear anything about debt limits is January 2025. This means that the deadline to raise the limit will be after the presidential elections of 2024.
Establish a budget for two years. The total non-defense budget will remain flat at the FY 2023 level of nearly $703 Billion next year. The freezing of non-defense expenditures is a reduction due to inflation. The non-defense budget won’t increase until 2025, when it will get a 1% boost to over $710 billion. There will no longer be growth limits after 2025.
Increase spending on defense. Plan would increase defense spending from $886 billion to $886.9 billion. This is the same level as Biden’s budget for 2024. By 2025 it will reach $895 billion. The increase in spending on veterans’ affairs would be another benefit.
Tighten work requirements for welfare programs. By 2025, the plan will move up the age of eligibility for Supplemental Nutrition Assistance Programs (SNAP) to 54. The work requirement only applies to adults who are able-bodied and do not have dependents. This does exclude homeless individuals, veterans, or those younger than 24 or in foster care. Medicaid is not affected. Kevin McCarthy, House Speaker of the House confirmed that he would not compromise on expanding work requirements for welfare programs. This was after his May 16 meeting with Biden. The White House had been adamantly opposed to it.
Refund Internal Revenue Service funds and COVID-19 assistance. This deal will claw back $80 billion worth of new IRS funds that were allocated by the Inflation Reduction Act. This plan also aims to recover billions of dollars in COVID funding that was not used.
The plan will make it easier for permits to be approved for new projects.
Approval for the Mountain Valley Pipeline. This plan will expedite a project that is already underway, but has legal obstacles to overcome. In a Sunday tweet, Sen. Joe Manchin from West Virginia stated: “I’m proud that I fought to secure the bipartisan backing necessary to bring this project to a successful conclusion.”
The plan for ending the pause in student loan payments should be codified. Since March 2020, the federal student loan repayment pause is in place. It will expire by August. This end date is set in stone by the deal. This deal doesn’t cancel Biden’s program to forgive student loans, as that is still in the Supreme Court’s hands.
On Wednesday, the House will vote on this plan.
Biden responded to a question during a press conference on Sunday about how he would respond to Democratic Party members who claim that he “made too many concessions” in the deal. “They will find out I did not.”
What brought us here?
On Jan. 19th, the U.S. Government reached its debt limit of $31.4 trillion. This triggered a possible “X-date”, which is estimated to be in June. At this point, the government will no longer have enough money to meet its legal obligations. The U.S. Treasury took “extraordinary steps” at the time and asked Congress to increase the debt limit.
But newly elected House Speaker Kevin McCarthy wanted to negotiate, while the White House said the equivalent of “no way.” The tension sparked months of will-they-or-won’t-they speculation about the future of the debt ceiling. The default countdown continued.
The House Republicans adopted the Limit, Save, Grow Act on April 26. This act had little chance of passing in the Democrat controlled Senate, but it served as a point of departure for discussions that have lasted several weeks.
In a letter dated May 26 in which Yellen referred to June 5, as the X date — shorthand for when the federal government will no longer be able to meet legal obligations, she stated that more than $130 Billion in scheduled payments would go to Veterans and Social Security recipients in June’s first few days. After that point however the Treasury is left with “an extremely low level” of resources.
Yellen previously pointed out that the X date was likely to be June 1. In a letter sent to McCarthy, Yellen reiterated these points. The Congressional Budget Office, which released their own estimate on May 12 pointing to the earliest possible “X date” of June 15, also warned Congress in each letter that a downgrade of credit was a possibility. Fitch Ratings’ announcement on May 24, that the U.S. was placed on rating watch-negative, made this possibility a real one.
Since 2002, Congress has acted on the debt limit more than 20 different times. Last time Republicans and Democrats were at odds over the debt ceiling, it was 2011. Last minute the government managed to avoid default, but it was not without causing chaos on the stock market and lasting economic consequences.
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