Averting a Debt Limit Crisis

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For months, the US has been battling a debt ceiling crisis. Democrats refused to negotiate, and Republicans pushed for a deal with right-wing policy priorities. It is not clear how, or whether, they will prevent disaster.

This week, the atmosphere in Washington changed. The chances of getting a deal now seem higher. Why? Because both sides are budged: Democrats are negotiating, and more Republicans have suggested that they are willing to compromise. Speaker Kevin McCarthy, the Republican leader, said yesterday for the first time that he sees “a path we can take.”

“This is a change in attitude from earlier in the week, when McCarthy was very pessimistic,” said my friend Carl Hulse, The Times’ chief Washington correspondent.

The stakes are still high. If Congress does not increase the debt ceiling – the limit on the amount of money that the US can borrow – the government may run out of money as early as June 1. It will no longer be able to pay its bills, potentially defaulting on debt. That can send financial markets, and the economy, into chaos (as detailed in this newsletter).

Today’s newsletter will explain what changed this week and why there is greater optimism about the deal.

For the past several months, President Biden and congressional Democrats have refused to negotiate on the debt limit. He views Republicans as holding the country hostage, threatening to destroy the economy in order to pass his policies. Democrats hope his stance will push Republicans to increase the debt limit without attaching conditions.

But then the Treasury Department announced this month that the US could reach the debt limit in just a few weeks. And House Republicans passed a debt limit bill with right-wing policy priorities, including sweeping but unspecified spending cuts, rolling back Biden policies and work requirements for Medicaid, food stamps and welfare benefits.

Democrats blinked. Last week and this week, the White House hosted congressional leaders to discuss the debt limit. This week, he had a small breakthrough: Biden agreed to have his staff meet directly with McCarthy’s aides to hammer out a deal. By cutting off other congressional leaders, Biden and McCarthy are more likely to reach a compromise quickly.

On the Republican side, it’s hard to see what kind of deal McCarthy can strike that will resolve House Republican factions, especially on the right. After all, it took 15 votes for Republicans to elect McCarthy as speaker. They have hardly held a joint caucus since. And McCarthy indicated he would push to increase the debt limit that is all-encompassing in the House Republican bill.

As the debt deadline approaches, and as Democrats begin to negotiate, Republicans soften their stance. Moderate Republicans say they are willing to compromise. “We know we’re not going to get everything,” Representative Don Bacon of Nebraska told Politico. And McCarthy’s staff, after all, met with Biden hoping to strike a deal.

What does the deal look like? It could include some restrictions on federal spending, clawback of unused Covid aid funds, changes to speed up permits for energy infrastructure and, possibly, new work requirements on some federal benefits. It would be a “fairly normal spending and budget deal, typical of a divided government, with an increase in the debt limit,” Carl said.

The deal won’t satisfy House Republicans on the right. But his vote is not needed to pass the bill if moderate Republicans join forces with Democrats.

Of course, a potential deal could still fall apart.

One of the current points is a new requirement that will force recipients of government benefits to prove that they have a job or are trying to find work. Republicans want to impose these conditions on Medicaid, food stamps and welfare. Biden indicated that he is open to food stamps and welfare, both of which already have work requirements, but not to Medicaid, which does not.

Republicans on the right say a deal should include work requirements for all three programs. Members of the right-wing Freedom Caucus urged McCarthy to stop negotiating with Biden until the Senate passes a House Republican bill with those conditions. More liberal Democrats say they will oppose new work requirements. “I cannot in good conscience support a debt ceiling proposal that pushes people into poverty,” said Senator John Fetterman, Democrat of Pennsylvania.

If they come together in opposition, the flanks on the left and right can explode the deal, my colleague Catie Edmondson, who covers Congress, wrote.

Congress could still pass the bill without that side, if moderate lawmakers from both parties vote. But there are limits to how far presidents and speakers can go without party support. Biden doesn’t want to upset liberal Democrats who may need him for future elections. And McCarthy wants to keep his job; if right-wing MPs feel betrayed, they can call for a vote to remove him as speaker.

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