After more than two weeks of discussions, negotiators representing the White House and House Republicans reached a deal over the Memorial Day weekend to suspend the debt ceiling until 2025. Now Congress is racing to get the package through both the House and the Senate before the looming June 5 deadline to avoid a catastrophic and unprecedented default.
Treasury Secretary Janet Yellen released a letter on May 26 in which she for the first time provided Congress with what it had been seeking for weeks: a specific default date. Yellen wrote that “we now estimate that Treasury will have insufficient resources to satisfy the government’s obligations if Congress has not raised or suspended the debt limit by June 5.” Her previous communications had indicated only that Treasury would run out of money to pay the country’s bills “as early as June 1,” but always with caveats that the date could be days or even weeks later.
The news of a specific deadline provided a needed boost to the negotiations, and a deal was announced late on May 27.
Key Elements of the Debt Ceiling Deal
The bill suspends the debt ceiling until January 1, 2025. At that point, the Treasury Department will be able to use accounting manoeuvres to get around the debt ceiling (referred to as “extraordinary measures”) for several months to ensure the country does not default. That means the debt ceiling won’t need to be raised until mid-2025, well after the 2024 presidential election and with a new Congress in place.
The legislation reduces discretionary spending for the next two years, but those cuts do not affect defense spending—which will see an increase in the coming year—nor will there be any cuts to Social Security, Medicare, or veterans’ health care programs. The bill also requires Congress to pass the 12 appropriations bills that fund every federal agency and program by the end of 2023 or risk an automatic across-the-board 1% cut in all funding.
The agreement also repurposes about $28 billion in unspent COVID-19 funds, as well as about $20 billion of the special funding for the Internal Revenue Service that was approved last year. The legislation increases work requirements for some food stamp recipients; reforms the permitting process for energy projects; and ends the freeze on student loan repayments that were put in place during the pandemic.
As with most compromises in Washington, the agreement left both parties disappointed. Now the focus has turned to getting the package through Congress as quickly as possible.
What Happens Next
House leaders are scrambling to cobble together the needed majority to pass the bill with a vote expected late on May 31. With numerous conservatives on the right and progressives on the left baulking at supporting the package, a coalition of Republicans and Democrats will be needed to reach the majority of at least 218 votes. House Speaker Kevin McCarthy (R-Calif.) expressed confidence that the bill would pass.
The bill will then proceed to the Senate, where it will need at least 60 votes to overcome a filibuster. Timing in the Senate can be a little tricky, as any one senator can employ a variety of parliamentary manoeuvres to delay a final vote for several days. Senators will need to agree to a specific timeline for debating and voting on the bill in order to ensure passage prior to the June 5 default deadline. Senate leaders from both parties were confident that such an agreement could be forged.
Once the House and Senate have passed the exact same bill, it can be signed into law by President Joe Biden. The Treasury would immediately be able to begin borrowing, and the debt ceiling debate will recede into the background until 2025.
The bottom line for investors is that market concerns about a potential default are abating. While it’s still possible that there could be unexpected bumps as the bill winds its way through Congress over the next few days, confidence is high that both chambers will approve the debt ceiling suspension prior to the June 5 deadline.
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