Legislators in the United States have reached a deal to avert what experts say would be catastrophic credit default, just days before the country faces the prospect of not being able to meet its debt repayment obligations.
Party leaders on Tuesday said senators had agreed to create a one-time law that will allow Democrats to raise the nation’s borrowing limit with just a simple majority vote in the 100-member Senate.
The Democrats hold 50 seats in the Senate, with Vice President Kamala Harris, a Democrat, able to vote in the case of a tie.
Lifting the debt limit usually requires 60 votes in the Senate.
The Democrat-controlled House of Representatives approved the one-time fix in an evening vote. It is now expected to be approved by the Senate in the coming days, with both chambers then expected to pass legislation raising the debt limit.
The Bipartisan Policy Center said last week it expected the US would no longer be able to meet its debt repayment obligations between December 21 and January 28.
US Treasury Secretary Janet Yellen has put the deadline even earlier, as soon as December 15.
“Nobody wants to see the US default on its debts. As Secretary Yellen has warned, a default could eviscerate everything we’ve done to recover from the COVID crisis,” Democratic Senate Majority Leader Chuck Schumer said on Tuesday.
“We don’t want to see that, I don’t believe we will see that, and I continue to thank all my colleagues for cooperating in good faith to preserve the full faith and credit of the United States.”
Crucially, Mitch McConnell, Republican leader in the Senate, is backing the novel, if convoluted, path forward.
“I think this is in the best interest of the country, by avoiding default,” he told reporters when questioned about the approach.
The US spends more money than it collects through taxation, so it borrows via the issuing of Treasury bonds, which are government securities available for purchase by individuals, institutions and countries.
Some 80 years ago, lawmakers introduced a limit on how much federal debt could be accrued.
That ceiling has been lifted dozens of times to allow the government to meet its spending commitments – usually without drama and with the support of both parties.
Democratic leaders have spent weeks warning of the havoc that a default would bring, including the loss of an estimated six million jobs and $15 trillion in household wealth, as well as increased costs for mortgages and other borrowing.
However, Republicans in both chambers of Congress initially objected to helping raise the limit this time around, saying they refused to support President Joe Biden’s “reckless” taxing and spending plans.
In reality, both parties see raising the borrowing cap as politically toxic, and Republicans are expected to weaponise the issue in the 2022 midterm election campaigns.