Debt ceiling negotiators make progress on spending, but still have ‘major issues’

WASHINGTON — The White House and congressional negotiators were closing in on a compromise agreement on Friday to raise the debt ceiling for two years, with just six days to go before the nation faces a grave threat of debt default.

But even as the outlines of an accord on the central issue of government spending came into view, new roadblocks threatened progress on a final deal.

“We continue to have major issues that we have not bridged the gap on,” Republican negotiator Rep. Garret Graves of Louisiana told reporters Friday afternoon in the Capitol.

Markets rose Friday, buoyed in part by optimism that the sides would reach a deal in time to meet the Treasury Department’s June 1 deadline. Failure to lift the borrowing limit could damage the U.S. economy and jeopardize benefits millions rely on to survive.

House Speaker Kevin McCarthy was optimistic as he arrived at the Capitol on Friday morning.

“I thought we made progress last night. We’ve got to make more progress now,” the California Republican told reporters.

Under a deal currently on the table, House Republicans would achieve at least two of their highest priorities in exchange for voting to raise the debt ceiling. Firstly, to roll back baseline federal spending in 2024 on most discretionary programs. And second, to rescind some of the $80 billion allocated for the Internal Revenue Service as part of 2022’s Inflation Reduction Act, two sources with knowledge of the talks told CNBC.

That rescinded IRS money would then be used by to cover much of the shortfall in domestic funding created by the GOP spending cuts, essentially preserving the programs while technically cutting the overall topline figure. The Pentagon and veterans health benefits would be spared from any cuts, and see their funding actually increase next year.

Details were still fluid on Friday, with two officials calling the IRS funding trade off “a live issue.

A White House spokesman and aides to Senate Majority Leader Chuck Schumer didn’t immediately respond to requests for comment on the emerging outlines.

A win for both sides?

On its face, the bargain could offer both parties a win. Republicans could claim, correctly, that they had secured a cut in baseline government spending for fiscal year 2024. Democrats, likewise, could say they preserved the vast majority of domestic programs at funding levels either equal to or just below their current ones.

But progress on one front in the talks belied new tensions on a separate issue: The Republican demand that any deal include new work requirements for recipients of federally subsidized health insurance, or Medicaid.

House Democrats vehemently object to the measure, saying its inclusion in any final deal will cost McCarthy Democratic votes he needs in order to pass any bill through the House.

In a sign of how contentious the issue had become Friday, Graves gave a curt response when a reporter asked him if the GOP would be willing to drop the work requirements in order to close a final deal.

“Hell no! Not a chance,” Graves replied.

Rep. Garret Graves, R-La., left, and Rep. Patrick McHenry, R-N.C., speak to reporters about debt ceiling negotiations as they leave the House Republicans’ caucus meeting at the Capitol Hill Club in Washington, May 23, 2023.

Bill Clark | CQ-Roll Call, Inc. | Getty Images

Graves is one of two House Republicans leading the negotiations. The other is Rep. Patrick McHenry of North Carolina. The White House has tapped Office of Management and Budget director Shalanda Young and Biden counselor Steve Ricchetti to negotiate on President Joe Biden’s behalf.

Both teams have been working around the clock for more than a week to find a path forward through a bitterly divided Congress in time to avoid a potentially catastrophic debt default.

On Friday, McHenry expressed frustration with the slow pace of progress.

“We are here night after night after night. The pressure is more, the consequences are greater. We recognize that. The White House should recognize that,” he told reporters on his way into McCarthy’s office.

What’s at stake

The urgency of the negotiators’ task was underscored this week by an announcement late Wednesday that the Fitch credit rating agency had placed the United States’ triple-A status on “rating watch negative.”

Officials at the International Monetary Fund wrote in their annual assessment of the United States, published Friday, that “brinkmanship over the federal debt ceiling could create a further, entirely avoidable systemic risk to both the U.S. and the global economy.”

Treasury Secretary Janet Yellen told Congress that unless the debt limit was raised or suspended by June 1, it was “highly likely” that the United States would be unable to meet some of its obligations.

Even a short-term, technical debt default for a few days could wreak havoc on the domestic economy by driving up interest rates and eroding trust in the U.S. dollar as the world’s reserve currency. Fitch, for example, has already indicated it would downgrade America’s credit rating if Congress blows past the June 1 deadline.

Janet Yellen, US Treasury secretary, speaks during the Independent Community Bankers Of America (ICBA) Capital Summit in Washington, DC, US, on Tuesday, May 16, 2023. 

Nathan Howard | Bloomberg | Getty Images

A prolonged default could force the government to delay payments like Social Security benefits and food assistance to low-income households, money that tens of millions of Americans rely upon to survive.

Yet if negotiators can reach a final deal Friday, there could still be time to meet the deadline, and for McCarthy to keep his promise to give House members 72 hours to read the bill before a vote.

In this scenario, a House vote to raise the debt limit could be held on Tuesday, with the Senate voting on Wednesday, officials said. The June 1 deadline is Thursday.

Republicans hold a narrow majority in the House, while Democrats have a slight edge in the Senate. So negotiators need to craft a bill that can pass both chambers.

But this does not mean negotiators need to reach an agreement that everyone will support. Democrats and Republicans acknowledged this week that any final bill is likely to lose votes from hardliners on both sides.

“I don’t think everybody is going to be happy at the end of the day,” McCarthy said Thursday in the Capitol. “That’s not how this system works.”

This is a developing story, please check back for updates.

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