Congress Clears Debt Deal, Averting Default
The Senate on June 1st approved legislation that will suspend the debt ceiling until 2025, sending the measure to President Joe Biden for his signature. In doing so, it beat a June 5th deadline to avoid a catastrophic and unprecedented government default. The 63-36 Senate vote came one day after an overwhelming 314-117 vote in the House of Representatives on the bill.
Biden plans to sign the bill into law on June 2nd. The Treasury would immediately be able to begin borrowing and the debt ceiling debate will recede into the background until 2025.
The votes bring an end to weeks of anxiety on Capitol Hill and the markets over when and whether the bitterly divided Congress would be able to find consensus on a debt ceiling bill. Tension had increased on May 26th, when Treasury Secretary Janet Yellen released a letter 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 27th.
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 maneuvers to get around the debt ceiling (referred to as "extraordinary measures") for several months to ensure the country does not default. That means that 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 one percent 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 was put in place during the pandemic.
As with most compromises in Washington, the agreement left both parties disappointed. But the strong bipartisan votes in both the House and Senate underscored the importance of avoiding a default, even if many lawmakers had reservations about the contents of the deal.