U.S. House of Representatives passes debt ceiling deal, but political fallout still unclear

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The U.S. looks set to avoid a potentially catastrophic debt default after a bipartisan majority in the Republican-led House of Representatives approved a deal between President Joe Biden and Speaker Kevin McCarthy that will suspend the country’s debt ceiling until January of 2025 in exchange for cuts to government spending.

Now, the Democrat-led Senate will rush to approve the legislative package before Monday, when the Treasury has said it will start running out of money.

The Fiscal Responsibility Act effectively gave each side some minor victories. But its political repercussions, particularly for Mr. McCarthy, remain an open question.

And it has focused renewed scrutiny on the entire concept of the debt ceiling, a quirk of U.S. politics that allows congressional leaders to threaten to crash the economy in order to wring concessions from the White House.

What will the bill do exactly?

The Fiscal Responsibility Act would remove the limit on federal government borrowing until after the next presidential election. In exchange for this, Mr. Biden agreed to temporary restrictions on government expenditures.

Most significantly, the bill would cap what Congress refers to as “non-defence discretionary spending” – a range of programs from education to national parks to scientific research – for the next two years. The cap would keep spending across these programs about the same next year as this year, with a modest increase after that. Given the current inflation rate of more than 4 per cent, this would amount to a spending cut. Defence spending would also be subject to a cap, albeit a slightly more generous one.

The act would also make it harder to qualify for the Supplemental Nutrition Assistance Program (better known as food stamps) by requiring people using the program to work until at least the age of 54, up from 49 now. The bill, however, exempts all veterans and homeless people on food stamps from having to work, which could actually lead to more people signing up.

The bill would take back some unspent COVID-19 funding, reverse a US$1.4-billion budget increase to the Internal Revenue Service, end the pandemic pause on student loan repayments and set a two-year limit on environmental impact studies for new energy projects.

The legislation leaves Mr. Biden’s signature policies – an infrastructure-building program and the Inflation Reduction Act, which pours subsidies into green energy – mostly untouched.

Mark Zandi, chief economist at Moody’s Analytics, said the effects of the bill would be minor, leading to a slight slowdown in job creation. The legislation, meanwhile, doesn’t address the country’s larger fiscal problems, such as how to fund Medicare and Social Security over the long term.

“The bill has some modest fiscal restraint, but it doesn’t change the unsustainable trajectory of our current fiscal situation – our longer-term problems are just much more daunting,” he said in an interview. “This is a baby step.”

While the President rallied most Democrats in the House of Representatives to back the legislation, he saw some high-profile defections, including Alexandria Ocasio-Cortez and Katie Porter, among others. Senator Bernie Sanders has also vowed to oppose the bill, warning that the cut to IRS funding will make it easier for corporations to “cheat on their taxes.”

The negotiations also stoked support on the left for doing away with the debt ceiling altogether. Why exactly the Democrats didn’t do this when they previously controlled the House is unclear. Now, Mr. Sanders and his allies are focused on lobbying Mr. Biden to invoke the 14th Amendment to the U.S. Constitution, which says the government’s debts “shall not be questioned,” in a bid to simply ignore the ceiling.

“I look forward to the day when he exercises this authority and puts an end, once and for all, to the outrageous actions of the extreme right-wing,” Mr. Sanders said in a statement.

Mr. Biden mused about such a move, which would almost certainly lead to a court battle, but ultimately chose not to attempt it.

What does this mean for the Republicans?

Mr. McCarthy proved that, despite holding only a four-seat majority, he could still extract concessions from Mr. Biden. But the cuts were significantly smaller than he originally pushed for.

This was at least in part an acknowledgment of reality. He needed a major assist from the Democrats to get any debt deal passed – and indeed, when the bill sailed through the House by a 314 to 117 vote, more Democrats supported it than Republicans.

The right-wing Freedom Caucus voted en masse against the legislation, and some of its members floated the possibility of trying to remove Mr. McCarthy as Speaker. So far, however, they have not put forward a concrete plan to replace him.

Jasmine Farrier, a political scientist at the University of Louisville, said both Mr. McCarthy and Mr. Biden have come out of the episode looking like the “adults in the room,” while the ideological hard-liners in each party are diminished.

“Biden and McCarthy showed they can negotiate with opponents and deliver the numbers,” said Prof. Farrier. “It empowers the political middle. Yes, the parties are polarized, but the extremes don’t hold as much control as we thought.”