WASHINGTON — President Joe Biden said Friday he was “very optimistic” about reaching a compromise agreement with House Republicans to raise the debt ceiling before the June 5 deadline announced earlier in the day.
“I hope tonight before the clock strikes twelve we have clear evidence that we have a deal,” Biden told reporters on the South Lawn of the White House just after 6:00 p.m. ET. “It’s very close and I’m optimistic,” he added.
White House and Congress negotiators are nearing an agreement to raise the debt ceiling for two years, officials familiar with the negotiations told CNBC on Friday.
“I hope that by tonight we will know if we can reach an agreement,” Biden said.
Both sides got air on Friday afternoon when Treasury Secretary Janet Yellen said the US won’t run out of money to pay its bills until June 5 – four days later than her previous estimate.
But even as the outlines of an agreement on the central issue of government spending began to emerge, new obstacles threatened progress towards a final agreement.
“We continue to have major problems that we have not found a solution to,” Republican negotiator Garret Graves of Louisiana told reporters in the Capitol on Friday afternoon.
Markets rose on Friday, buoyed in part by confidence that the sides would reach an agreement before the Treasury Department runs out of money. Failure to raise the credit limit could hurt the US economy and jeopardize the benefits millions depend on to survive.
According to a proposal on the table Friday, House Republicans would meet at least two of their top priorities in exchange for a debt ceiling hike. First, to reduce baseline federal spending in 2024 on most discretionary programs. And second, to scrap some of the $80 billion allocated to the Internal Revenue Service under the 2022 Inflation Reduction Act, two sources with knowledge of the talks told CNBC earlier in the day.
Those withdrawn IRS funds would then be used to cover much of the domestic funding shortfall created by Republican spending cuts, essentially preserving the programs while technically reducing overall revenue. The Pentagon and veteran health services would be spared cuts, and their funding would even increase over the next year.
Details were still unclear as of Friday, with two officials describing the IRS funding dispute as “a current issue.”
A victory for both sides?
At first glance, a bargain like this could mean a win for both parties. Republicans could rightly claim that they achieved a basic government spending cut for fiscal year 2024. Democrats could also say they have kept the vast majority of domestic programs at funding levels either at or slightly below current levels.
However, progress on one front in the talks has belied new tensions on another issue: Republicans are demanding that any deal include new labor requirements for recipients of federally subsidized health insurance or Medicaid.
House Democrats vehemently oppose the measure, saying including it in any final agreement would cost McCarthy the Democrat votes he needs to pass a bill through the House.
In a sign of how contentious the issue had become Friday, Graves gave a curt response when a reporter asked him if the Republican Party would be willing to drop the labor requirements in order to finalize a deal.
“Damn no! Not a chance,” Graves replied.
Biden struck a similarly defiant tone when a reporter asked the president what he would say about “Democrats who don’t want you to bend to job demands.”
“I bow to no one,” Biden shot back.
Rep. Garret Graves, R-La., left, and Rep. Patrick McHenry, RN.C., speak to reporters about the debt ceiling negotiations during the House Republican caucus meeting May 23 at Capitol Hill Club in leave Washington. 2023
Bill Clark | CQ Roll Call, Inc. | Getty Images
Graves is one of two House Republicans leading the negotiations. The other is Rep. Patrick McHenry of North Carolina. The White House has appointed Office of Management and Budget director Shalanda Young and Biden’s adviser Steve Ricchetti to negotiate on behalf of President Joe Biden.
Both teams have been working around the clock for more than a week to find a way forward through a bitterly divided Congress in time to avoid a potentially catastrophic debt default.
What’s at stake
The urgency of the negotiators’ task was underscored this week by the announcement late Wednesday that rating agency Fitch had placed the United States’ triple-A status on “rating watch negative.”
International Monetary Fund officials wrote in their annual assessment of the United States, released Friday, that “a risky approach to exceeding the sovereign debt ceiling could create another, entirely avoidable, systemic risk for both the U.S. and the global economy.”
Yellen told Congress Friday that the US “will not have sufficient resources to meet government commitments unless Congress raises or suspends the debt limit by June 5.”
Even a short-term technical default of a few days could wreak havoc on the domestic economy, raising interest rates and undermining confidence in the US dollar as the world’s reserve currency. Fitch, for example, has already indicated that if Congress fails to meet Yellen’s deadline, it would downgrade America’s credit rating.
Janet Yellen, US Secretary of the Treasury, speaks during the Independent Community Bankers Of America (ICBA) Capital Summit in Washington, DC, the United States, on Tuesday, May 16, 2023.
Nathan Howard | Bloomberg | Getty Images
A prolonged default could force the government to delay payments like Social Security benefits and food aid to low-income households, money tens of millions of Americans depend on to survive.
The four extra days give negotiators more time to reach an agreement while still ensuring Congress has enough time to vote on legislation to raise the credit limit. The June 1 deadline put lawmakers under a tight schedule, especially since McCarthy had promised to give members of the House of Representatives 72 hours to read the bill before a vote.
Republicans have a narrow majority in the House of Representatives, while Democrats have a slight lead in the Senate. Therefore, negotiators must draft a bill that can pass both chambers.
However, this does not mean that the negotiators have to reach an agreement that everyone supports. Democrats and Republicans this week acknowledged that any final bill is likely to lose votes from hardliners on both sides.
“I don’t think everyone will be happy at the end of the day,” McCarthy said Thursday at the Capitol. “That’s not how this system works.”