Agreement on debt deal – it’s going to be so turbulent now

Biden spoke of an “important step forward” and McCarthy of “historic spending cuts”. The US President stressed that the deal would reduce US spending while protecting important programs for working people and the welfare system. At the same time, he admitted: “The agreement represents a compromise, which means that not everyone gets what they want.”

McCarthy also tried to convince his Republicans that he could not push through all the demands: “I don’t think everyone will be happy at the end of the day,” he said. But fundamentally, the agreement is “worthy of the American people.”

The statements made by the two negotiators indicate a tough process in the US Congress. Both Biden and McCarthy seem to anticipate there will be opposition to the deal among Democrats and Republicans alike. Both politicians urged the chambers of Congress to “pass the agreement immediately.”

At these points there is a risk of resistance

Realistically, the draft must go through both chambers of the US Congress and be signed by the President later this week in order for the impending default to actually be averted. Most lawmakers are away for the weekend for a holiday and will not return to Washington until Monday evening or Tuesday morning.

In the United States, parliament sets a debt ceiling at irregular intervals and determines how much money the state can borrow. In the meantime, this debt ceiling of around 31.4 trillion US dollars has been reached and the Treasury must tap into the capital reserves. Biden and his Democrats need Republicans in Congress, which is split between the two parties, to raise the debt ceiling.

These are the main features of the agreement – and there is a risk of resistance in these areas:

• Drastic savings plans: According to the TV channel CNN, Biden and McCarthy agreed on a new debt ceiling for the next two years. Both parties would therefore no longer have to deal with the debt limit before the 2024 presidential elections. Expenditure in the coming year should therefore be limited to the level of the current budget year and may only increase by around 1 percent in the 2025 budget year. This excludes defense spending.
• Right flank protest: It’s possible that the cuts don’t go far enough for some ultraconservatives. Republican Rep. Ralph Norman of South Carolina called the tentative agreement “insane,” and Rep. Dan Bishop of North Carolina responded on Twitter with a vomiting emoji. Ex-President Donald Trump recently called for blocking an increase in the debt limit. A default is more manageable than “a bad deal,” Trump said.
• Hot topic social: The Republicans were able to partially prevail with cuts in the social sector. For example, McCarthy demanded that people who receive certain social benefits such as food stamps should have a job in return. Apparently, stricter requirements have now actually been decided. Funds for new tax investigators are also to be cut and billions of unspent corona funds are to be diverted. Left-wing Democrats have called any cuts in welfare and healthcare “unacceptable.” The head of the so-called “Congressional Progressive Caucus”, Pramila Jayapal, announced street protests.

• Turbo for energy projects? It is unclear whether both sides have launched a so-called “permitting reform” to speed up new energy projects. This would benefit Biden’s climate protection agenda – but it would also make it easier to approve new oil pipelines and gas wells.

• Dispute over Ukraine aid: The last word on the multi-billion dollar US aid to Ukraine has not yet been spoken. The defense budget was excluded from the debt limit talks. But the topic should become acute again by autumn at the latest, when the budget is being negotiated. Some Republicans want to block Ukraine aid. The week-long drama surrounding the debt limit showed just how strong their leverage is.

And so it goes on now: If the House of Representatives were to pass the bill at the first attempt, it would be forwarded to the Senate shortly thereafter. Days of debate are to be expected there. This would drag the vote until the weekend and the date of the calculated default would be dangerously close. In the Senate, each individual representative can block legislation and force procedural votes.

The situation is particularly muddled in the House of Representatives because the Republicans only have a very narrow majority. There are several MPs in the group – many of them supported by Trump – who show no interest in a compromise. At the beginning of the year, McCarthy was only elected chairman of the parliamentary chamber after many purchases by his group. This had greatly weakened his position.

The dispute over the debt limit is now a major test for McCarthy, in which he must deliver results for his party. He must also succeed in rallying a few hardliners behind a possible agreement in order to have the broadest possible majority in his party. If he had to rely on a particularly large number of votes from the Democrats because his party colleagues opposed him, that would further weaken him.

The dispute had also cast a shadow over Biden’s trip to the G7 summit in Japan, with Biden continuing to negotiate during the trip. The 80-year-old Biden is running for a second term, he wants to prevent an economic downturn in the USA at all costs.

The months-long dispute is already threatening the creditworthiness of the United States. The rating agency Fitch retained the top rating “AAA” for the world’s largest economy, but lowered the outlook for creditworthiness to “negative”, so that a downgrade could still be a threat.

The so-called “X-date” — the point at which the US government will run out of cash — is ambiguous because it depends on ever-changing federal tax revenues. US Treasury Secretary Yellen had initially estimated that “Date X” would already be reached on June 1st, she is currently assuming June 5th. Other estimates give a buffer of up to June 15th.

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