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White House and G.O.P. Close In on Deal to Raise Debt Limit and Cut Spending
The details were not finalized, but negotiators were discussing a compromise that would allow Republicans to point to spending reductions and Democrats to say they had prevented large cuts.
Jim Tankersley and
Reporting from Washington
Top White House officials and Republican lawmakers were closing in Thursday on a deal that would raise the debt limit for two years while imposing strict caps on discretionary spending not related to the military or veterans for the same period. Officials were racing to cement an agreement in time to avert a federal default that is projected in just one week.
The deal taking shape would allow Republicans to say that they were reducing some federal spending — even as spending on the military and veterans’ programs would continue to grow — and allow Democrats to say they had spared most domestic programs from significant cuts.
Negotiators from both sides were talking into the evening and beginning to draft legislative text, though some details remained in flux.
“We’ve been talking to the White House all day, we’ve been going back and forth, and it’s not easy,” Speaker Kevin McCarthy told reporters as he left the Capitol on Thursday evening, declining to divulge what was under discussion. “It takes a while to make it happen, and we are working hard to make it happen.”
The compromise, if it can be agreed upon and enacted, would raise the government’s borrowing limit for two years, past the 2024 election, according to three people familiar with it who insisted on anonymity to discuss a plan that was still being hammered out.
The United States hit the legal limit, currently $31.4 trillion, in January and has been relying on accounting measures to avoid defaulting since then. The Treasury Department has projected it will exhaust its ability to pay bills on time as early as June 1.
In exchange for lifting the debt limit, the deal would meet Republicans’ demand to cut some federal spending, albeit with the help of accounting maneuvers that would give both sides political cover for an agreement likely to be unpopular with large swaths of their base voters.
Understand the U.S. Debt Ceiling
It would impose caps on discretionary spending for two years, though those caps would apply differently to spending on the military than to nondefense discretionary spending. Spending on the military would grow next year, as would spending on some veterans’ care that falls under nondefense discretionary spending. The rest of nondefense discretionary spending would fall slightly — or roughly stay flat — compared with this year’s levels.
The deal would also roll back $10 billion of the $80 billion Congress approved last year for an I.R.S. crackdown on high earners and corporations that evade taxes, though that provision was still under discussion. Democrats have championed the initiative, and nonpartisan scorekeepers have said the funding would reduce the budget deficit by helping the government collect more of the tax revenue it is owed. But Republicans have denounced it, claiming falsely that the money would be used to fund an army of auditors to go after working people.
“The president and his negotiating team are fighting hard for his agenda, including for I.R.S. funding so it can provide better customer service to taxpayers and crack down on wealthy tax cheats,” a White House spokesman, Michael Kikukawa, said in an email on Thursday in response to a question about the provision.
As the deal stood on Thursday, the I.R.S. money would essentially shift to nondefense discretionary spending, allowing Democrats to avoid further cuts in programs like education and environmental protection, according to people familiar with the pending agreement.
The plan had yet to be finalized, and the bargainers continued to haggle over crucial details that could make or break any deal.
“Nothing is done until you actually have a complete deal,” said Representative Patrick T. McHenry of North Carolina, one of the lead G.O.P. negotiators, who also declined to discuss the specifics of the negotiations. “Nothing’s resolved.”
The cuts contained in the package were all but certain to be too modest to win the votes of hard-line fiscal conservatives in the House. Liberal groups were already complaining on Thursday about the reported deal to reduce the I.R.S. funding increase.
But people familiar with the developing deal said that negotiators had agreed to fund military and veterans’ programs at the levels envisioned by President Biden in his budget for next year. They would reduce nondefense discretionary spending below this year’s levels — but much of that cut would be covered by the shift in the I.R.S. funding and other budgetary maneuvers. White House officials have contended those shifts would functionally make nondefense discretionary spending the same next year as it was this year.
All discretionary spending would then grow at 1 percent in 2025, after which the caps would lift.
Mr. McCarthy had nodded on Thursday to the idea that a compromise to avert a default would most likely draw detractors from both parties.
“I don’t think everybody is going to be happy at the end of the day,” he said. “That’s not how this system works.”
Another provision of the deal seeks to avert a government shutdown later in the year, and would attempt to take away Republicans’ ability to seek deeper cuts to government programs and agencies through the appropriations process later in the year.
The exact details on how such a measure would work remained unclear on Thursday evening. But it was based on a penalty of sorts, which would adjust the spending caps in the event that Congress failed to pass all 12 stand-alone spending bills that fund the government by the end of the calendar year.
Negotiators were still at loggerheads over work requirements for social safety net programs and a permitting overhaul for domestic energy and gas projects.
“We have legislative work to do, policy work to do,” Mr. McHenry said. “The details of all that stuff really are consequential to us being able to get this thing through.”
As negotiators inched closer to a deal, hard-right Republicans on Thursday were becoming increasingly anxious that Mr. McCarthy would sign off on a compromise they viewed as insufficiently conservative. Several right-wing Republicans have already vowed to oppose any compromise that retreats from cuts that were part of their debt-limit bill.
“Republicans should not cut a bad deal,” Representative Chip Roy of Texas, an influential conservative, wrote on Twitter on Thursday morning, shortly after telling a local radio station that he was “going to have to go have some blunt conversations with my colleagues and the leadership team” because he did not like “the direction they are headed.”
Representative Ralph Norman, Republican of South Carolina, said he was reserving judgment on how he would vote on a compromise until he saw the bill, but added: “What I’ve seen now is not good.”
Former President Donald J. Trump, who has said Republicans should force a default if they do not get what they want in the negotiations, also was weighing in. Mr. McCarthy told reporters he had spoken with Mr. Trump briefly about the negotiations — “it came up just for a second,” the speaker said. “He was talking about, ‘Make sure you get a good agreement.’”
After playing a tee shot on his golf course outside Washington, Mr. Trump approached a reporter for The New York Times, iPhone in hand, and showed a call with Mr. McCarthy.
“It’s going to be an interesting thing — it’s not going to be that easy,” said Mr. Trump, who described his call with the speaker as “a little, quick talk.”
“They’ve spent three years wasting money on nonsense,” he added, saying, “Republicans don’t want to see that, so I understand where they’re at.”
Meanwhile back at the raunch
Why Even a Debt Ceiling Deal Could Be Bad News for the Stock Market
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A debt default will be bad, but even a deal could have a negative impact on the stock market.
Mark Wilson/Getty ImagesA U.S. default on its debt would be disastrous, full stop.
Stock marketsSPX +0.88% would crash and bond yields would soar. That potential self-imposed calamity has kept investors on edge in recent weeks, as Democratic and Republican politicians in Washington work to hash out a compromise before the June 1 estimated date when the U.S. Treasury runs out of cash to pay its bills.
The thing is, a debt-ceiling deal won’t be all good news for investors or the U.S. economy either. Republicans are demanding sharp spending cuts right as the economy appears to be slowing. Meanwhile, a flood of Treasury issuance after a deal is reached will drain liquidity from markets, weighing on risk assets.
“A debt ceiling deal is going to result in fiscal contraction,” writes Jefferies senior economist Thomas Simons. “The current impasse is focused on spending cuts, and we see a good chance that the GOP ends up getting a good deal of discretionary spending cuts that they are looking for. Just like the debt ceiling debacle [in 2011,] we may end up with fiscal austerity at a very unfortunate time, just as the economy is heading into a recession.”
Big cuts to government spending that Republicans are pushing could mean slower economic growth in 2024 and beyond, depending on the eventual details of a deal.
The Treasury will need to rebuild its cash balance in its so-called General Account immediately after a deal is reached. That will mean a flood of Treasury bill issuance in early June, potentially increasing yields and pulling cash out of the system.
“When the debt limit is eventually raised, [Treasury] issuance will need to increase significantly to rebuild the TGA: that’s $500bn or so going to the Treasury account at the Fed and out of the economy,” writes TS Lombard macro strategist Skylar Montgomery Koning. “That means liquidity tightening unless there is a sharp drop in private credit demands at the same time (which seems unlikely).”
Cash in the General Account has declined by more than $500 billion since the debt ceiling was hit in January, according to government data. That has countered the Federal Reserve’s ongoing quantitative tightening program, which includes the runoff of $60 billion of Treasuries per month. Rebuilding the account will come on top of QT, adding to the drain on liquidity in the U.S. economy. That’s a major headwind for risky assets.
All of this is not to say that stocksDJIA –0.11% can’t rally upon the announcement of a deal to lift the debt ceiling and stave off default. Practically any deal is much better than no deal. But it won’t be an all-clear signal for markets beyond a short-term bounce.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
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