Debt ceiling deal reached, IRS funding in spotlight


WASHINGTON — White House and congressional negotiators edged closer Friday to a compromise deal to raise the debt ceiling for two years, with just six days until the nation faces a serious threat of default. .

But even as the outlines of an agreement on the central issue of public spending have emerged, new obstacles have threatened to make progress on a final agreement.

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This chart shows the stock market risk of falling over the wire on a debt ceiling deal

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“We continue to have major issues that we haven’t closed the gap on,” said Republican negotiator Rep. Louisiana’s Garret Graves to reporters Friday afternoon at the Capitol.

Markets rose on Friday, buoyed in part by optimism that the parties would reach an agreement in time to meet the June 1 deadline set by the Treasury Department. Failure to lift the borrowing limit could hurt the U.S. economy and jeopardize the benefits that millions of people rely on to survive.

House Speaker Kevin McCarthy was optimistic as he arrived at the Capitol on Friday morning.

“I thought we made progress last night. We need to make more progress now,” the California Republican told reporters.

Under a deal currently on the table, House Republicans would achieve at least two of their highest priorities in exchange for a vote to raise the debt ceiling. First, cut base federal spending in 2024 for most discretionary programs. And second, to reverse some of the $80 billion allocated to the Internal Revenue Service under the Cut Inflation Act of 2022, two sources with knowledge of the talks told CNBC.

This canceled IRS money would then be used to cover much of the domestic financing gap created by GOP spending cuts, essentially preserving programs while technically reducing the overall figure. The Pentagon and Veterans Health Benefits would be spared any cuts and see increased funding next year.

Details were still fluid on Friday, with two officials calling the IRS funding compromise a “live issue.”

A White House spokesman and aides to Senate Majority Leader Chuck Schumer did not immediately respond to requests for comment on the emerging contours.

A victory for both sides?

Rep. Garret Graves, R-La., left, and Rep. Patrick McHenry, RN.C., speak to reporters about the debt ceiling negotiations as they leave the House Republican caucus meeting at the Capitol Hill Club in Washington on May 23. 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 from North Carolina. The White House tapped Office of Management and Budget Director Shalanda Young and Biden adviser Steve Ricchetti to negotiate on behalf of President Joe Biden.

The two teams worked 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 default.

On Friday, McHenry expressed frustration with the slow progress.

“We’re here night after night after night. The pressure is greater, the consequences are greater. We recognize that. The White House should recognize that,” he told reporters as he walked into McCarthy’s office. .

What’s at stake

The urgency of the dealmakers’ task was underscored this week by the announcement on Wednesday evening that ratings agency Fitch had placed the United States’ triple-A status on “negative rating watch.”

International Monetary Fund officials wrote in their annual evaluation of the United States, published on Friday, that “the tension on the federal debt ceiling could create an additional, entirely avoidable systemic risk, for both the United States and the global economy”.

Treasury Secretary Janet Yellen told Congress that unless the debt ceiling is raised or suspended by June 1, it’s “very likely” the United States won’t be able to to meet some of their obligations.

Even a short-term technical default for a few days could wreak havoc on the domestic economy by driving up interest rates and eroding confidence in the US dollar as the world’s reserve currency. Fitch, for example, has already indicated that it will downgrade America’s credit rating if Congress misses the June 1 deadline.

Janet Yellen, United States Treasury Secretary, speaks at the Independent Community Bankers Of America (ICBA) Capital Summit in Washington, DC, U.S., Tuesday, May 16, 2023.

Nathan Howard | Bloomberg | Getty Images

A prolonged default could force the government to delay payments such as Social Security benefits and food assistance to low-income households, money that tens of millions of Americans rely on to survive.

Still, if negotiators reach a final deal on Friday, it could still be time to meet the deadline and for McCarthy to fulfill his promise to give House members 72 hours to read the bill before a vote.

In that scenario, a House vote to raise the debt ceiling could take place on Tuesday, with the Senate voting on Wednesday, officials said. The June 1 deadline is Thursday.

Republicans hold a narrow majority in the House, while Democrats have a slight advantage in the Senate. Negotiators must therefore craft a bill that can pass through both chambers.

But that doesn’t mean negotiators have to reach a deal that everyone will support. Democrats and Republicans acknowledged this week that any final bill risks losing the votes of extremists 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.”

This is a developing story, please check for updates.

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