US President Joe Biden urged the Senate to pass the bill as quickly as possible.
Image: Drew Angerer/Getty Images
After a tense month-long stand-off, in a show of support, the Democrats and the Republicans, in an overwhelming majority, voted to raise the United States’ debt limit, currently $31.4 trillion, to pave the way for the treasury to borrow and meet debt obligations and avert an unprecedented debt default that could trigger a major global economic downturn.
In a statement, President Joe Biden said, “Neither side got everything it wanted. That’s the responsibility of governing. I want to thank Speaker McCarthy and his team for negotiating in good faith.” Biden urged the Senate to pass the bill as quickly as possible. The US Treasury cautioned it would be unable to pay bills if the debt ceiling isn’t raised or suspended by June 5.
This was not an easy to deal to seal. Reportedly, many Republicans were unhappy that there were too few spending restrictions in the agreement in exchange for raising the debt limit. On the other hand, Democrats were miffed with provisions, for example, relating to restarting student loan repayments, conditions for federal food aid, and an Appalachian natural gas line.
“This agreement is good news for the American people and the American economy. It protects key priorities and accomplishments from the past two years, including historic investments that are creating good jobs across the country. And it honors my commitment to safeguard Americans’ health care and protect Social Security, Medicare, and Medicaid. It protects critical programs that millions of hardworking families, students, and veterans count on,” Biden said in the statement.
In a nutshell, the 99-page bill proposes to suspend the debt ceiling until January 1, 2025—past the next presidential election—with cuts in federal spending and curbs on aid for low-income families. As per the deal, non-defence spending will remain flat in FY24 and can be hiked by 1 percent in the next fiscal. According to the Congressional Budget Office, the deal could potentially result in $1.5 trillion savings over ten years.
The bill allocates nearly $886 billion for defence budget and $704 billion for non-defence spending. It states the Congress would be required to greenlight 12 annual spending bills. Any failure to meet this criterion could result in a 1 percent spending cutback. The overarching objective of the agreement is to attempt to rein in federal budget growth to 1 percent for the next six years.
Also read: US debt ceiling: Of political game theory and unsustainable debt
The legislation provides for full medical care for military veterans as proposed by President Biden in the 2024 budget blueprint. It includes a fund with a corpus of $20.3 billion for veterans exposed to toxic substances and environmental hazards.
But the bill spells out that unspent Covid relief funds, to the tune of around $30 billion, would be struck off from government spending. It claws back unpaid funds from a dozen-odd federal programmes, such as small business loans, internet connectivity for rural areas, and rental assistance, that received aid during the coronavirus pandemic. The agreement earmarks around $5 billion towards a programme for developing the next generation of Covid-19 vaccines.
Furthermore, the bill incorporates new changes to work requirements for government aid. For instance, it aims to increase the age limit to 54 years from 49 earlier by 2025. This is in line with one of the key demands of the Republicans. However, the Democrats scored with a few new benefits for veterans, homeless citizens, children in foster care. But each of these changes would expire in 2030.
Also, Biden’s bid to waive off $10,000 to $20,000 in debt for millions of borrowers did not pass muster with the Republicans. In a compromise, the president agreed to restart student loan repayments by August-end. The matter of student loan relief is in court and the Supreme Court is expected to pass its verdict by the end of this month.
Interestingly, the bill outlines changes in the National Environmental Policy Act. It streamlines and simplifies requirements for procedural reviews to fast-track energy projects. However, several clean energy tax credits have been revoked. While the Republicans believe the tax breaks distort the market and waste taxpayer money, the government has argued that tax credits spur private-sector investments, boost manufacturing jobs, and accelerate the economic growth engine.
President Biden added, “I have been very clear that the only path forward is a bipartisan compromise that can earn the support of both parties. This agreement meets that test.”
According to media statements, most corporate CEOs gave a thumbs up to the debt ceiling deal and Asian markets were marginally up in trade. On Wednesday, before the deal was approved, most US benchmark indices ended in the red.
While the debt ceiling has been suspended, the US debt trajectory is unsustainable and fiscal challenges need to be addressed. The response of rating agencies will be critical. Remember, in 2011, the bill was passed just in the nick of time, and the S&P downgraded US debt from AAA, triggering jitters in the equity market.