Debt ceiling explained: What to know about the showdown in Washington as default looms

Debt Limit
The national debt clock is seen in midtown Manhattan, Thursday, May 25, 2023. Both President Joe Biden and House Speaker Kevin McCarthy are speaking hopefully of the likelihood of an agreement to raise the government's debt limit and avert an economically chaotic federal default. (AP Photo/Mary Altaffer)
Debt Limit
Speaker of the House Kevin McCarthy, R-Calif., arrives at the Capitol in Washington, Friday, May 26, 2023. McCarthy says the mediators "made progress" on a deal with the White House to raise the debt limit and cut federal spending, as they race for agreement this weekend. (AP Photo/J. Scott Applewhite)

WASHINGTON (AP) — House Republicans still do not have a deal with President Joe Biden to raise the debt ceiling as the nation is a little more than a week away from a potentially catastrophic default.

House Speaker Kevin McCarthy, R-Calif., said Friday that negotiators were working to “finish the job” and seal a deal before the United States runs out of cash to pay its bills. Republicans worked through the night with the White House to find agreement on spending cuts that GOP lawmakers have demanded in exchange for raising the debt limit.

McCarthy said he did not know whether they would finalize the details in the next 24 hours.

“I thought we made progress yesterday," he said. “I want to make progress again today. And I want to be able to solve this problem.”

Treasury Secretary Janet Yellen warned Congress on Friday that the government could default as soon as June 5 — four days later than previously estimated. A default would potentially devastate the U.S. and global economy depending on how long the standoff goes.

A look at the negotiations and why they are happening:

WHAT IS THE DEBT CEILING FIGHT ALL ABOUT?

Once a routine act by Congress, the vote to raise the debt ceiling allows the Treasury Department to continue borrowing money to pay the nation's already incurred bills.

The debt limit vote in more recent times has been used as a political leverage point, a must-pass bill that can be loaded up with other priorities.

House Republicans, newly empowered in the majority this Congress, are refusing to raise the legal limit unless Biden and the Democrats impose federal spending cuts and restrictions on future spending.

The Republicans say the nation's debt, now at $31 trillion, is unsustainable. They also want to attach other priorities, including stiffer work requirements on recipients of government cash aid, food stamps and the Medicaid health care program. Democrats oppose those requirements.

Biden had insisted on approving the debt ceiling with no strings attached, saying the U.S. always pays its bills and defaulting on debt is non-negotiable. But he launched negotiations after House Republicans passed their own legislation and made clear they would not pass a clean debt ceiling increase.

WHAT HAPPENS IF THE DEBT CEILING ISN'T RAISED?

There isn’t really a blueprint for what would happen. But a first-ever government default would threaten the economy. Yellen and economic experts have said it could be “catastrophic.”

On Wednesday night, the rating agency Fitch put the nation’s credit on “Rating Watch Negative,” which amounts to a warning that it might downgrade the U.S. credit as a result of the impasse.

If rating agencies such as Fitch were to actually downgrade America’s debt, it would mean that Washington would have to pay higher interest rates on Treasury bonds, notes and bills.

White House estimates say a prolonged default could cause 8.3 million job losses and a world-shaking recession, while even a brief default could lead to 500,000 fewer jobs. Moody’s Analytics has estimated that a default of no longer than a week would lead to the loss of 1.5 million jobs.

The repercussions would be broad. Mark Zandi, chief economist at Moody’s Analytics, said that “no corner of the global economy will be spared.”

Yellen has said that federal government payments to millions of families would “likely go unpaid,” including Social Security beneficiaries, veterans and military families. Disruptions to government operations also would impact “air traffic control and law enforcement, border security and national defense, and food safety.”

IS A RESOLUTION CLOSE?

The bipartisan negotiators have routinely reported “progress.” But weeks of talks have so far failed to produce a deal.

The two sides are looking at an agreement that would raise the debt ceiling for two years — until after the next presidential election — cutting spending for 2024 and imposing 1% cap on spending growth for 2025.

They have been at odds over how to trim annual budget deficits. Republicans are determined to cut spending; Biden’s team favors holding spending levels flat.

“It’s really coming down to one thing, this has been about spending," McCarthy said Friday morning.

But reaching a negotiators' agreement is only part of the challenge. Any deal would also have to pass the Republican-led House and Democratic-majority Senate with significant bipartisan support. In the end, leaders from both parties will need to muscle it over the finish line.

WHAT ARE THE HANGUPS?

Democrats have strenuously objected to a Republican push to impose stiffer work requirements on people who receive government aid through food stamps, Medicaid health care and the cash assistance programs.

Biden has publicly kept the door open to some discussion over work requirements. But House Republicans say the White House is balking at their proposals.

Louisiana Rep. Garret Graves, one of McCarthy's negotiators, told reporters that “Democrats right now are willing to default on the debt” over their opposition to increased work requirements for the Supplemental Nutrition Assistance Program, or food stamps.

Asked if Republican bargainers would be willing to drop their demands on the issue, as the White House wants, Graves replied: “Hell no, hell no, not a chance.”

Republicans have long pushed to boost existing work requirements for federal aid. Democrats have successfully fought previous efforts, but McCarthy and his allies have maintained that there will be no deal this time if Democrats don’t agree to changes.

There are other policy priorities under consideration, as well, including steps to improve the electrical grid and speed the permitting of construction and development of energy projects. While members of both parties favor those ideas, Republicans and Democrats haven't always agreed on how to resolve it.

North Carolina Rep. Patrick McHenry, another of McCarthy's negotiators, said the negotiations are “small step by small step" and that there's “not an hour that goes by” that Republicans are not communicating with the White House.

“There is forward progress, but each time there is forward progress, the issues that remain become more difficult and more challenging," McHenry said.

CAN THEY GET IT DONE IN TIME?

As each day goes by with no deal, the timeline gets narrower.

The Treasury says it could run out of money as soon as June 5. It's hard to pinpoint an exact date the government would start missing payments, because tax revenues and expenditures vary from day to day.

McCarthy has promised that he will allow 72 hours for lawmakers to look over any proposed deal before it is brought for a vote, so the soonest the House could vote at this point is early next week. Lawmakers are out of town until Tuesday, though McCarthy could call them back from recess.

Once passed in the House, the bill would go to the Senate, where Majority Leader Chuck Schumer, D-N.Y., has said it could pass more quickly.

So it's crunch time. And before the legislative text can be reviewed, it needs to be written, which won't happen until a deal is made.

IS THERE A BACKUP PLAN IF TALKS FAIL?

Democrats have urged Biden to raise the debt ceiling on his own, without help from Republicans.

Progressives want Biden to invoke a clause in the Constitution’s 14th Amendment that says the validity of the public debt in the United States “shall not be questioned.” Default, the argument goes, is therefore unconstitutional.

The president has resisted that option, which raises legal issues. He says it's a "question that I think is unresolved,” as to whether he could act alone.

In Congress, meanwhile, House Democratic leader Hakeem Jeffries has launched a process that would “discharge” the debt ceiling issue to the House floor forcing a vote on raising the limit. But it has no Republican support.

___

Associated Press writers Colleen Long, Stephen Groves and Farnoush Amiri contributed to this report.

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