With the clock ticking down to the June 5 government default date, lawmakers have no time to lose.
The debt ceiling crisis moved closer to resolution on May 31st when the House of Representatives approved legislation that will suspend the debt limit until mid-2025. The strong bipartisan vote of 314-117 came just days before the June 5th default deadline. The bill has now moved to the Senate, where it is expected to be approved as soon as June 2nd.
After more than two weeks of discussions, negotiators representing the White House and House Republicans reached a deal over the Memorial Day weekend to suspend the debt ceiling until 2025. The deal left Congress racing to get the package through both the House and the Senate before the looming June 5th deadline to avoid a catastrophic and unprecedented default.
Treasury Secretary Janet Yellen released a letter on May 26 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 27.
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 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 1% 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 overwhelming bipartisan vote in the House underscored the importance of avoiding a default, even if many lawmakers had reservations about the contents of the deal.
The bill is now under consideration in the Senate, where it will need at least 60 votes to overcome a filibuster. Timing in the Senate can be a little tricky, as any one senator can employ a variety of parliamentary maneuvers to delay a final vote for several days. Senators will need to agree to a specific timeline for debating and voting on the bill in order to ensure passage prior to the June 5th default deadline. Senate leaders from both parties were confident that such an agreement could be forged and were optimistic that the bill could move to a final vote as soon as June 2nd.
Once the House and Senate have passed the exact same bill, it can be signed into law by President Joe Biden. The Treasury would immediately be able to begin borrowing, and the debt ceiling debate will recede into the background until 2025.
The bottom line for investors is that market concerns about a potential default are abating. While it is still possible that there could be unexpected bumps as the bill winds its way through the Senate, confidence is high that a final vote on the debt ceiling suspension will take place prior to the June 5th deadline.