By Jarrett Renshaw, Richard Cowan and Andy Sullivan
WASHINGTON (Reuters) – The White House and Republicans in Congress are looking to finalize a deal on Friday to raise the US government’s $31.4 trillion two-year debt ceiling while cutting spending on everything but the military and veterans, said a US official.
Negotiators for Democratic President Joe Biden and Speaker of the House of Representatives Kevin McCarthy appeared to be closing in on a deal as the two sides agreed on key issues, such as spending caps and funding for the Internal Revenue Service and the military.
However, items including job requirements for federal aid recipients still held back the deal, the official said.
If Congress fails to raise its self-imposed debt ceiling next week, it could lead to a bankruptcy that would shake financial markets and plunge the United States into a deep recession.
The deal under consideration would increase funding for discretionary spending on military and veterans while essentially holding nondefense discretionary spending at current year levels, said the official, who requested anonymity because she was not authorized to discuss internal discussions. A two-year extension would mean that Congress would not have to address the limit again until after the 2024 presidential election.
The White House is considering scaling back its plan to increase funding at the IRS to hire more auditors and target wealthy Americans, the official said.
The funding for defense and veterans’ affairs matches Biden’s budget released earlier this year, a second US official said.
The agreement would leave many details to be sorted out in the coming weeks and months.
Each of them will have to convince enough members of their party in the narrowly divided Congress to vote for an eventual deal, no mean feat with far-right Republicans saying they won’t support any deal without sweeping budget cuts and progressive Democrats resisting new job demands on anti-poverty programs.
“The only way forward is with a bipartisan agreement. And I believe we will come to an agreement that will allow us to move forward and protect the hardworking Americans of this country,” Biden said Thursday.
One of the Republican negotiators, Rep. Patrick McHenry, said the two sides have expressed their concerns and they are very well understood.
“That’s why we’re still here at 11 a.m. fighting over serious matters with serious consequences,” he told reporters late Thursday.
One thing that has added to the complexity is that it’s unclear how long lawmakers have to act. The Treasury Department was warned it may not be able to meet all of its obligations by June 1, but said on Thursday it would sell $119 billion worth of debt due on that date. a rock-solid deadline.
Fitch Ratings warned this week that it could downgrade the U.S. federal government’s credit rating as a result of the deadlock, which would drive up government borrowing costs and undermine the United States’ position as the backbone of the global financial system.
A similar stalemate in 2011 led Standard & Poor’s to downgrade its US debt rating.
“We thought political polarization in the country was likely to continue, and second, we were also concerned about rising debt,” said David Beers, former head of sovereign ratings for S&P. “On both counts our expectations, if anything… have been exceeded. I have no doubt this was the right decision.”
Most lawmakers have left Washington for Memorial Day, but their leaders have warned them to be ready to return for votes when a deal is struck.
High-growth health and retirement programs would be unaffected, even though they are expected to drive up US debt in coming years.
Republicans have rejected Biden’s proposed tax increases for businesses and wealthy people, while Biden has opposed Republican proposals to tighten job requirements in some anti-poverty programs and relax oil and gas drilling rules.
Republican negotiator representative Garret Graves said late Thursday that the White House “refuses to negotiate work requirements,” which he called “crazy.” He said disagreements over Social Security funding and Medicare versus work requirements are still an issue between the two sides.
House leaders have said lawmakers will have three days to think about the deal before a vote, and any legislator in the Senate has the power to suspend the action for days. At least one, Republican Mike Lee, has threatened to do so.
The deadlock has unnerved investors, pushing up government borrowing costs by $80 million so far, Deputy Treasury Secretary Wally Adeyemo said.
Several credit rating agencies have said they are testing the United States for a possible downgrade, which would drive up borrowing costs even further.
(Reporting by Jarrett Renshaw, Richard Cowan, Nandita Bose, David Morgan, Pete Schroeder, Moira Warburton, and Gram Slattery, written by Andy Sullivan; editing by Scott Malone, Mary Milliken, Diane Craft, Lincoln Feast, and Chizu Nomiyama)