US debt limit deal: How we got here

Washington, DC – After weeks of talks and warnings of potential economic disaster, the White House and congressional leaders in the United States have reached a deal to increase the debt ceiling, one that lawmakers now must turn into law before the US defaults on its obligations.

The crisis and its resolution have been months in the making. They trace back to the November 2022 midterm elections, which saw Republicans win a narrow majority in the US House of Representatives, depriving President Joe Biden’s Democratic Party of the ability to pass legislation on its own.

The agreement negotiated by Biden and Republican House Speaker Kevin McCarthy would suspend the debt ceiling for two years and cap government spending during the same period.

It also would bolster the Pentagon’s budget and add new restrictions on receiving food benefits, while diverting some funds from the Internal Revenue Service (IRS), the US tax agency, and streamlining licensing for energy projects.

The deal, which would avert a much-feared default, checked some items on the Republican wishlist of reigning in public spending without fundamentally changing the way the government operates under Biden.

Al Jazeera looks at how the debt ceiling came to the fore and what is next.

What is the debt ceiling?

Like most countries, the US relies on tax revenue and borrowing money to meet its financial obligations. This includes funding for social programmes, the military, public employee salaries and paying off old debts.

US law, however, restricts how much the government can borrow – the so-called debt ceiling. Every few years, Congress has to raise that limit. It currently stands at $31.4 trillion.

The debt ceiling has been raised dozens of times over the past decades. The legislative process often proceeds without controversy. But this year, McCarthy sought policy concessions in exchange for raising the limit.

Both chambers of Congress – the House and the Senate – have to pass legislation to allow the government to borrow more money. Republicans took control of the House of Representatives in the November vote, giving them the power to block legislation.

The White House’s initial position was that the debt ceiling should not be used as a bargaining chip by Republicans. Biden administration officials argued that it is the responsibility of lawmakers to ensure that the US pays what it owes.

“The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past,” the Department of the Treasury said in a factsheet.

But Republicans pushed to link the debt ceiling to government spending, which they say has been out of control under Biden.

And so, the standoff began early this year.

As the government approached its borrowing limit, panic ensued about the US’s ability to have money to operate while also avoiding a default on its previous debts, which would shake the global confidence in the American government as a borrower.

McCarthy’s speakership bid

Internal Republican politics may have contributed to the impasse. In January, it took 15 rounds of voting for McCarthy to be elected speaker after a group of far-right lawmakers held up his bid to lead the House.

To win the Republican dissenters over, McCarthy had to adopt parts of their ultraconservative agenda, including pledging to limit government spending.

Some Democrats predicted the Republican infighting made evident by the speakership election would lead to a debt ceiling deadlock.

“McCarthy just agreed to a deal with far right insurrectionists that would hold the entire US and global economy hostage to extreme cuts to everything from housing to education, healthcare, Social Security and Medicare,” Congresswoman Ilhan Omar wrote on Twitter at that time.

In April, McCarthy put forward a bill to raise the debt ceiling that would advance key Republican policy priorities – capping government spending over the next decade, ending Biden’s student loan forgiveness plan and slashing IRS funding.

House Republicans narrowly passed that measure later in the month without the support of any Democrats. But the bill was dead on arrival in the Democratic-controlled Senate.

Talks start

Early in the year, the Biden administration labelled the debt ceiling as a “non-negotiable” issue.

“Raising the debt ceiling is not a negotiation; it is an obligation of this country and its leaders to avoid economic chaos,” White House press secretary Karine Jean-Pierre said in January.

Biden said he would be willing to talk over the budget and specific spending, not the government’s borrowing limit.

But with Republicans showing no signs of willingness to unconditionally raise the limit and the clock ticking down on a possible default, Biden met congressional leaders – including McCarthy – at the White House on May 9 to address the issue.

Talks between Biden and McCarthy would continue directly and indirectly throughout the month. Earlier in May, the president cut short a visit to Japan to attend the G7 summit to return to the negotiations.

Last week, Treasury Secretary Janet Yellen sent a letter to McCarthy warning that the government may run out of money by June 5 if the debt limit issue is not resolved.

“If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests,” Yellen wrote.

After several rounds of talks, McCarthy and Biden announced a tentative deal on Sunday with the president praising the breakthrough as an important step that “takes the threat of catastrophic default off the table”.

What happens next?

Now Congress needs to pass a bill reflecting the deal, dubbed the Fiscal Responsibility Act of 2023. Its drafters expected it to pass – but not without opposition.

Both progressives and right-wing lawmakers have voiced misgivings about the agreement. Conservative Senator Rand Paul called the budget caps “fake spending cuts” agreed to by “fake conservatives”.

Republican Congressman Matt Rosendale said in a statement that the legislation “fails to cut spending and continues to fund the Democrats’ and Biden Administration’s radical agenda”, promising to vote against it.

Congresswoman Nancy Mace, a Republican, also said she was a “no” on the bill.

Washington is broken.

Republicans got outsmarted by a President who can’t find his pants.

I’m voting NO on the debt ceiling debacle because playing the DC game isn’t worth selling out our kids and grandkids.

— Rep. Nancy Mace (@RepNancyMace) May 30, 2023

Congresswoman Pramila Jayapal, chair of the Congressional Progressive Caucus, told CNN that reducing the IRS’s funding and adding restrictions to food assistance is “bad policy”.

Asked whether progressives will oppose the bill, Jayapal said congressional leaders have “to worry” about that prospect.

The House is considering the bill on Tuesday before a full vote on Wednesday. Then the Democratic-controlled Senate will take it up later this week.