US Congress Approves Debt-limit Suspension, Avoiding Default

On Thursday, the US Senate approved a bipartisan bill, supported by President Joe Biden, which lifts the government's debt ceiling of USD 31.4 trillion. This action prevents a potentially unprecedented and historic default from occurring. 

The Senate vote of 63-36 endorsed the bill that had already been passed by the House of Representatives on Wednesday. This decision came after months of partisan disagreements between Democrats and Republicans, with lawmakers racing against time to reach a resolution. 

The Treasury Department had issued a warning that if Congress failed to take action by 5 June, it would be unable to repay all its bills. 

"We are avoiding default tonight,” said Senate Majority Leader Chuck Schumer as he guided the bill through the Senate, which comprised 100 members. 

Prior to the vote, senators debated nearly a dozen amendments, ultimately rejecting all of them before the final vote. The bill is now headed to President Biden for his signature before the deadline on Monday. 

This legislation suspends the statutory limit on federal borrowing until 1 January 2025. 

Both Schumer and Minority Leader Mitch McConnell, representing the Republican Party, delivered on their promise to expedite the bill's progress which was negotiated between President Biden and Republican House Speaker Kevin McCarthy. 

Schumer addressed the Senate, stating that America can now breathe a sigh of relief. 

‘Time is a luxury the Senate does not have’ 

Republicans had obstructed the approval of any increase in the debt limit until they secured significant spending cuts, which they believed would address the rapidly increasing national debt. 

In contrast, Biden advocated for tax increases on wealthy individuals and corporations to tackle the growing debt, but Republicans adamantly opposed any form of tax hikes. 

Both parties protected the expansive Social Security and Medicare programs from cuts, while Republican House Speaker Kevin McCarthy refused to consider any reductions in military or veterans' spending. 

As a result, the burden of spending cuts fell largely on domestic "discretionary" programs. Eventually, Republicans achieved approximately USD 1.5 trillion in reductions over ten years, which may or may not be fully realised. Initially, they proposed savings of USD 4.8 trillion over a decade. 

Technically, the Treasury reached its borrowing limit in January. Since then, it has been utilising "extraordinary measures" to secure the necessary funds for the government's expenses. 

President Biden, Treasury Secretary Janet Yellen, and congressional leaders all recognized that a debt default due to insufficient funds would have severe consequences. This included sending shockwaves through global financial markets, potentially leading to job losses, a recession in the United States, and increased interest rates for families on various financial obligations like mortgages and credit card debt. 

Senate Majority Leader Chuck Schumer emphasised these concerns while steering the bill towards final approval. 

A default, he warned, "would almost certainly cause another recession. It would be a nightmare for our economy and millions of American families. It would take years, years to recover from." 

On Wednesday evening, the bill was passed in the Republican-controlled House with a vote of 314-117. The majority of those who voted against the bill were Republicans. 

Schumer stressed the urgency, stating on Thursday, "Time is a luxury the Senate does not have. Any needless delay or last-minute holdups would be an unnecessary and potentially dangerous risk." 

Among the amendments discussed were proposals for deeper spending cuts than those outlined in the House-approved bill and measures to halt the swift final approval of an energy pipeline in West Virginia. 

Sometime in the making 

Republican Senator Roger Marshall proposed an amendment to implement stricter border controls due to the high number of immigrants arriving at the US-Mexico border. He argued that his measure would end the "culture of lawlessness" at the southern border. 

However, the Senate rejected the amendment. Democrats argued that it would remove protections for child migrants and deprive American farmers of much-needed workers. 

Additionally, some Republicans desired increased defence spending beyond what was included in the House-passed bill. 

In response, Schumer clarified that the spending caps in the legislation would not restrict Congress from approving additional funds for emergencies, including providing assistance to Ukraine in its conflict with Russia. 

"This debt ceiling deal does nothing to limit the Senate's ability to appropriate emergency supplemental funds to ensure our military capabilities are sufficient to deter China, Russia, and other adversaries and respond to ongoing and escalating national security threats, including Russia's evil ongoing war of aggression against Ukraine," said Schumer. 

The bill was the result of extensive negotiations between senior aides for President Biden and Republican House Speaker Kevin McCarthy. 

The primary dispute revolved around spending on discretionary programs like housing, environmental protections, education, and medical research for the next few years, which Republicans sought to significantly reduce. 

According to the nonpartisan Congressional Budget Office, the bill would save USD 1.5 trillion over ten years. This falls short of the USD 3 trillion in deficit reduction proposed by Biden, primarily through new taxes. 

The United States faced a similar threat of default in 2011, which had a severe impact on financial markets, resulted in the government's credit rating downgrade, and raised borrowing costs. 

However, this time, there was less drama as it became evident last week that Biden and McCarthy would reach a bipartisan agreement with sufficient support to pass through Congress.