U.S. President Joe Biden and Speaker Kevin McCarthy have struck a tentative deal on Saturday to raise the US debt ceiling in an ‘agreement in principle’. If approved, it averts a looming default that will bring relief to nervous markets and bring a sense of relief to the global economy. This was the 79th time it’s been raised since 1960. The US has defaulted four times, the last 1971 when the U.S. left the Bretton Woods convention. Next step is overcoming entrenched partisan political divisions and a time-consuming process to pass the legislation before a June 5 default deadline (Treasury Secretary Janet Yellen’s revised X-date).
The big question how much interference will the more extreme of the Democrats and Republicans run with revisions to pass the legislation before June 5. Though one suspects Yellen’s revised X-date is a moveable target. On May 24, Fitch Ratings placed the US’s AAA credit rating on watch in a move that reflected mounting concerns the US would go over the brink.
- The deal will raise America’s $US31.4 trillion ($48.1 trillion) borrowing limit for two years, until after the next presidential election in late 2024, and will include caps on government spending in the same period.
- The two-year budget agreement cuts far less spending than the $US4.8 trillion in reductions the House put on the table at the start of talks.
- Structure of two-year US budget deal is consistent with agreements reached during last three debt limit battles.
- Progressives will also agitate, who have already pestered that Biden hasn’t been vocal enough on the deal.
- McCarthy says no new taxes or programs in the deal and that it has ‘historic reductions is spending’
- It will claw back unused COVID funds, speed up the permitting process for some energy projects and includes some extra work requirements for food aid programs for poor Americans.
- Keeps non-defense spending ‘roughly flat for current fiscal year and 2024
- The budget deal includes full funding for veterans’ medical care and elevates funding for the toxic exposure fund over 2024 levels.
- There are no budget caps after 2025
- Funding for the IRS has been reduced by $US10 billion out of the $US80 billion additional Biden sought to go after ‘wealthy tax cheats’
- Agreed-upon spending levels reflect what Biden admin had negotiated at the end of the last calendar year
- Averts a 22% of non-defense discretionary priorities and 10 years of caps
- Includes no changes to Medicaid that had been sought by Republicans
- Phases in and then sunsets SNAP (food stamp) aid time limits to people up to age 54
- It includes some extra work requirements for the poor
- Includes reforms reducing number of vulnerable people of all ages subject to time limits
- Inflation Reduction Act funding preserved for clean energy funds for lower income Americans and pollution cleanup
- Student loan payments will not resume while US Supreme Court considers student debt case
The biggest risk to the deal’s passage through Congress comes from a possible revolt from staunchly conservative Republicans close to former president Donald Trump who has argued for a default if the deal isn’t good enough.
Financial markets are expected to react favorably to the news on Monday, with the ASX and Asian stock markets among the first. Wall Street is closed until Tuesday for the Memorial Day holiday. Bond markets had sold off hard over the past week and the US dollar has risen. Stock markets have run up in the U>S> expecting a deal, much of that thanks to NVidia.
The agreement raising its debt ceiling is part of a new two-year budget agreement that echoes the structure of the past three such deals. The agreement keeps non-defense spending roughly flat for the current fiscal year and 2024 and removes budget caps after 2025.
The spending levels reached reflect those the Biden administration had negotiated at the end of the last calendar year. Significantly averting what would have been an economic numbing 22% cut in non-defense discretionary priorities and a decade-long set of caps.
From The TradersCommunity News Desk