US House approves deal to raise debt ceiling and avoid default – 05/31/2023 – Market

After weeks of tense negotiations, the US House of Representatives approved this Wednesday (31) a bill to increase the country’s debt ceiling and thus avoid a default, scheduled for next week, which would have global repercussions.

The approved project eliminates the debt ceiling of US$ 31.4 trillion (R$ 156.8 trillion) for two years, giving the president, Joe Biden, respite from having to negotiate it again next year, in the midst of campaign for re-election.

It also keeps non-military spending at the same level for fiscal year 2024 (which runs from October this year to September next) and caps spending increases to 1% in fiscal year 2025, regardless of inflation in the period. Military spending, on the other hand, could grow above that limit in the next two years.

Among the government’s concessions are the end of the freeze on student debt, increased applications for social assistance programs such as food aid and government reimbursement of funds released for Covid-19 that were not used.

According to the Congressional Budget Office (CBO), the law cuts federal spending by $1.5 trillion over the next decade.

Now, the proposal goes to the Senate, where it should be approved more quickly, since the Democrats have the majority of votes in the House. The Biden government hopes to have the project approved next Monday (5), the deadline set by the Treasury Department to avoid a government default.

The government’s concessions are a reflection of the Republican majority in the House, opposing the president, led by Kevin McCarthy, who has been pressuring the Biden government to reduce public spending. The lack of a solution in recent weeks has spooked financial markets, forcing the United States to pay record interest rates on some bond sales. A possible default would drop US stock markets by up to 45%, according to the White House, and could trigger an immediate recession.

Only last Saturday night did the president of the House and the White House reach the agreement voted on this Wednesday. The project, however, was resisted by both Republicans and Democrats until the last minute.

Republicans like Nancy Mace of South Carolina found the bill shy of cutting spending. “Congress acts like it’s going to restrict spending, but wait until there’s a hurricane-like emergency, market stabilization, [Guerra da] Ukraine, etc. The use of supplemental emergency funds is how Washington skirts the edges and that’s why this deal is worse than it looks,” she said, one of the main opponents of the deal with the Democrats, this Wednesday.

There is also resistance in the Senate. Senator Bernie Sanders (independent) said he could not vote “with a clear conscience”, citing a “cutting of vital nutritional assistance for women, babies, children and the elderly, while refusing to ask billionaires, who have never been better off, to pay more taxes”, among other points.

The last time the country came this close to default was in 2011, under Barack Obama, when the Senate and House were led by Republicans.

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UNDERSTAND THE DISCUSSION

What is the debt ceiling? It is the total amount of money the US government is allowed to borrow via US Treasuries to meet financial obligations. As the country’s budget is in deficit, it needs to borrow huge amounts of resources

The US has hit the ceiling. And now? The limit was technically reached on January 19th. Since then, the Treasury has used “extraordinary measures” to meet its obligations. These alternatives, however, run out on June 5 according to the Treasury Department

What’s in game?If the government runs out of money, it will no longer be able to issue debt and pay its bills. He could end up defaulting on his debts if he fails to make payments required by bondholders. This would be devastating for the US and the global economy.

What are the next steps?The approved project now goes to the Senate and needs to be on President Joe Biden’s table by next Monday (5) for the government to avoid a default

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