US President Joe Biden and top congressional Republican Kevin McCarthy are closing in on a deal that would raise the government’s $31.4 trillion debt ceiling for two years while capping spending on most programmes, news reports say.
A default could upend global financial markets and push the United States into a major recession. Credit rating agency DBRS Morningstar put the US on review for a possible downgrade on Thursday, echoing similar warnings by Fitch, Moody’s and Scope Ratings.
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Fitch warned it could downgrade the US’s triple A rating because of the “brinkmanship” over the debt limit. Another agency, S&P Global, downgraded US debt following a similar debt-ceiling standoff in 2011.
The months-long standoff has spooked Wall Street, weighing on US stocks and pushing the nation’s cost of borrowing higher. Deputy Treasury Secretary Wally Adeyemo said concerns about the debt ceiling had pushed up the government’s interest costs by $80m so far.
The potential agreement would increase funding for discretionary spending on military and veterans while essentially holding non-defence discretionary spending at current year levels, an official, who requested anonymity, told Reuters news agency.
“Time’s up for all of these games around here,” Democratic Representative Don Davis, a US Air Force veteran, said at a press conference.
Representative Kevin Hern, who leads the powerful Republican Study Committee, told Reuters a deal was likely by Friday afternoon.
The White House is considering scaling back its plan to boost funding at the Internal Revenue Service to hire more auditors and target wealthy Americans, the official said.
A second US official said IRS funding is an open issue, but the main thrust is ensuring the agency executes the president’s priorities, even if there is a small haircut or funding is moved around.
The final deal would specify the total amount the government could spend on discretionary programmes such as housing and education, according to a person familiar with the talks, but not break that down into individual categories. The two sides are just $70bn apart on a total figure that would be well over $1 trillion, according to another source.
The two sides met virtually on Thursday, the White House said. Biden said they still disagreed over where the cuts should fall.
“I don’t believe the whole burden should fall back to middle-class and working-class Americans,” he told reporters.
House Speaker McCarthy said the two sides have not reached a deal. “We knew this would not be easy.”
It is unclear precisely how much time Congress has left to act. The Treasury Department was warned it could be unable to cover all its obligations as soon as June 1, but on Thursday said it would sell $119bn worth of debt that will come due on that date, suggesting to some market watchers it was not an iron-clad deadline.
“They have suggested in the past that they would not announce actions that they did not believe they had the means to settle,” Gennadiy Goldberg, senior rates strategist at TD Securities in New York. “So I do think that’s a positive note.”
Any agreement will have to pass the Republican-controlled House of Representatives and the Democratic-controlled Senate. That could be tricky as some right-wing Republicans and many liberal Democrats said they were upset by the prospect of compromise.
“I don’t think everybody’s going to be happy at the end of the day. That’s not how the system works,” McCarthy said.
Biden has resisted Republican proposals to stiffen work requirements for anti-poverty programmes and loosen oil and gas drilling rules, according to Democratic Representative Mark Takano.
Democrats focused their attacks on what they said would be devastating cuts in federal aid for veterans – ranging from healthcare and food aid to housing assistance – if Republicans got their way in the negotiations.