The main outcome of the first top level talks on resolving the standoff over raising the US debt ceiling – and staving off a potential debt default and accompanying global financial instability – is that the talking will continue.
The speaker of the US House of Representatives Kevin McCarthy said on Wednesday that he had had a “very good discussion” with his political rival, president Joe Biden on the debt limit and government spending.
McCarthy, who is a Republican, sounded positive that an opportunity existed to reach an agreement – potentially to run for two years.
But this is likely to be just the start of a process that could run for many weeks.
Ultimately, the devil will be in the detail of any agreement the Republican leadership and the White House could hammer out. And given McCarthy’s fractious Republican Party with its small majority in the House, it remains to be seen if he could bring everyone on his side along with him.
Republicans now control the House and some want to use the debt ceiling issue as leverage to secure concessions elsewhere, particularly on their demands that federal government spending be reined in.
But the big question is where do Republicans want to make cuts. And there are divisions within the party over where precisely the axe should fall.
McCarthy has spoken about tackling waste and fraud.
He has said Republicans will not try to scale back the two largest benefit programmes: social security, which provides payments to those who have retired as well as Medicare, the health insurance programme for older people.
Some Republicans have argued that defence spending should also be off-limits.
However, this would mean that more than 40 per cent would be immune from spending cuts.
Biden, on the other hand, has insisted repeatedly he expects Congress to raise the borrowing cap with no strings attached – and that he will not negotiate on conditions for an increase.
A White House memo earlier this week set out its strategy for the talks to McCarthy. It said it wanted the speaker to “commit to the bedrock principle that the United States will never default on its debts” and second to produce his own plans for reducing the US deficit.
The Biden administration is suspicious about the real intentions of the Republicans and their lack of specifics. It has repeatedly argued that Republicans actually do want to target the social and medical programmes for cuts while at the same time pushing for tax breaks for the wealthy and big corporations.
Democrat and White House strategists suggest that given McCarthy’s small majority and the deals he had to make with his right wing to secure the position of speaker, it will be difficult for him to design a budget programme that could keep all his members on board.
At a fundraiser in New York on Tuesday Biden set out his view on the speaker: “Look at what the present leader of the Republican Party – a decent man, I think – McCarthy – look – look what he had to do. He had to make commitments that are just absolutely off the wall for a speaker of the House to make in terms of being able to become the leader.”
While the mood music seemed better after the Biden/McCarthy talks, the US government is still on track to run out of money and the clock is ticking.
On January 19th, the government reached the statutory $31.4 trillion limit on the amount it could legally borrow to meet its day-to-day obligations. The US treasury in the meantime is using a series of “extraordinary measures” – essentially accounting manoeuvres – to continue to pay its bills.
Treasury secretary Janet Yellen said last month this practice would allow the government to get by financially, at least until the beginning of June.
However, in the absence of a new political agreement on borrowing or on at least a suspension of the legal debt limit, the US could run out of money to pay its debts sometime after that.
Yellen told congressional leaders it was critical they either raised or suspended the official debt ceiling.
“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihood of all Americans and global financial instability.”
She said that in the past even threats of a default had caused “real harms” including the only credit rating downgrade in US history in 2011.
In September 2021, when there was a previous standoff over the debt ceiling, Moody’s Analytics warned a prolonged crisis could lead to a full recession, wiping out billions of dollars in economic growth and eliminating up to six million jobs in the US.
One proposal that had been mooted in recent days was the debt ceiling being raised in return for a new commission to look at future spending reforms. However, McCarthy appeared to dismiss this suggestion.
“I don’t need a commission to tell me where there is waste, fraud and abuse. We don’t need a commission to tell us to do our job that the American public elected us to do.”