Lawmakers came to an agreement in principle on Sunday night, just days before a potential debt default.
After a tense few weeks of negotiation, President Joe Biden and US House of Representatives Speaker Kevin McCarthy have reached an agreement in principle to ensure that the US can continue to pay its bills past June 1.
Earlier this month, the US Treasury warned that the US is likely to default on June 1 if Congress doesn’t suspend or increase the debt ceiling. Risk of default increased so much that Fitch, a major credit rating agency, put the United States’ AAA long-term foreign-currency issuer default rating on negative watch, negatively impacting stocks in Asia.
Here are the major points outlined in the draft agreement.
1. The debt ceiling will be suspended until 2025.
The current debt ceiling sits at $31.4 trillion. Sunday’s deal outlines that the ceiling will not be raised, but suspended entirely until 2025.
This means that the US can continue to pay its bills for the next two years without interfering with the next presidential election, which will take place next year.
2. No new taxes, but increased funding for the IRS to enforce.
Democrats secured $80 billion for the next ten years to fund the Internal Revenue Service (IRS) to continue enforcing tax rules on the wealthiest Americans. The IRS said it will use the funds to “modernise” the system.
Despite criticism from progressive Democrats who wanted to raise funds by taxing the rich and powerful, the deal doesn’t impose any new taxes or tax hikes.
3. Spending will be capped, except for defence.
The deal keeps non-defence spending flat until next year, with a 1% rise in 2025.
Defence spending on the other hand will increase by 3% to $886 billion. Funding for the medical needs of military veterans will also increase.
AP News said that the White House estimates government spending would be reduced by at least $1tn, but this isn’t official.
4. Access to welfare will be tougher, but not significantly.
Position on welfare is one of the biggest differences between Democrat and Republican politicians. When negotiating the deal, Republicans wanted to make welfare benefits more stringent by implementing work requirements for recipients to receive food and healthcare assistance, while Democrats opposed the inclusion of work requirements.
Medicaid remained unchanged in the deal, but the age at which work requirements are applicable for SNAP (food stamps) was raised from 50 to 54. In a win for Democrats, veterans and homeless individuals are excluded from this requirement.
Global markets can now sigh a breath of relief.
The deal comes just days before a default. A default would be the first ever US default, and it would not only cripple the US economy but would send shockwaves through global financial markets since the US dollar is the world’s primary reserve currency.
Cryptocurrency markets have responded positively to the news of a deal, with Bitcoin and Ether up by 2.5% and 2.9% respectively over the past seven days.
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