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Behind the Debt Limit Curtain: The Deal That Redefines America's Fiscal Landscape

When President Biden & House Speaker McCarthy sat down to negotiate, the US had already reached its debt limit of a whopping $31.4 trillion.

Yeah, mfers that's trillions with a "t".

The US government was in a tight spot and wasn't allowed to issue more securities to pay its bills. Failure to do so could have had devasting consequences for the global economy. Failure to do so could have had devastating consequences for the global economy.

So Biden and McCarthy struck a deal to suspend the debt limit until 2025, allowing the US government to borrow what it needs to cover its spending without congressional approval.

The deal wasn't all about borrowing money. They did agree to cut some spending and return unspent Covid relief funds, which Congress approved. Biden signed into law the Fiscal Responsibility Act of 2023, just before the deadline of January 5th (x-date), when the Treasury Department estimated it would run out of cash.

So basically, in layman's terms, the whole deal got a green light from Congress & Biden put his signature on it to make it official. They named it "Fiscal Responsibility Act of 2023" (I know, original, right?).

It was a relief because the Treasury Department said they would be running out of cash by January 5th. I'm not sure how they estimate that. Yanet Yellen's estimation was June first.

As a result of this act, the US can borrow additional funds to fulfill its financial commitments, postponing the collapse of the economy.

The casino continues!

More info about the debt ceiling in my previous posts:

So here's the deal

As mentioned, the US maxed out its $31.8 trillion in January this year (2023). The Treasury Department's been pulling some pretty clever moves to avoid being unable to pay its bills, and they would run out of money unless Congress stepped up and either raised or paused the debt limit.

So a plan was made that would satisfy both the democrats and republicans. The plan was to suspend the debt limit until 2025. There have also been decisions to limit, freeze and cut certain types of spending, which is the stuff that Congress has to approve each year.

The spending limit is split into 2 categories

Defense
Nondefense

Defense is all about the military and national security, while nondefense is pretty much everything else, like education, health, infrastructure, science, etc.

Does anyone have a quick rundown on the deal? Sure

Defense spending will get a 3% bump in 2024. This is part of a shared agreement that the US/West needs to stay competitive with countries like China.
Nondefense will stay the same in 2023 and then get a tiny 1% increase in 2025. These increases don't take into account inflation, so.... they're actually effectively cut!
The IRS is losing $10 billion in funding, even though they got a big increase last year to help crack down on tax evasion.
Citizens who can work and don't have dependents will need a job to get food stamps, with a few exceptions like veterans and homeless people.
They're going to speed up energy permitting and green-light controversial pipeline projects.
Citizens consistently paying their student loans for 3 years will have the rest of their payments forgiven.
If Congress can't get all 12 government funding bills passed by the end of each year, there will be automatic spending across the board.

It's a pretty interesting deal, and it's lopsided. Usually, defense and nondefense spending get treated the same, but this time around, defense is getting a bigger boost.

This shows how Democrats and Republicans have different priorities. The deal also doesn't tackle big spending areas like Social Security and Medicare, which are big contributors to the long-term debt but are super sensitive politically.

Basically, the deal is a middle ground between what the Democrats and Republicans wanted. Democrats were hoping for a straightforward increase to the debt limit, while Republicans wanted to have some serious limits on spending and make changes to the entitlement programs.

I imagine 2 dogs, and this deal is like throwing a bone at the Republicans with some spending restraints while also giving the Democrats a break from worrying about the debt limit until after the 2024 presidential election.

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A Rare Show of Unity Amid Washington's Money Wars

So Biden & McCarthy, two big shots in American politics, agreed to pause the debt ceiling until 2025. They also put a cap on some federal spending and made a few changes to things like the federal food program, funding for the IRS, and Covid-19 relief funds.

While not everyone was pleased with the deal, some on the left wanted more money for social programs, while on the right side of the political spectrum, they wanted more cuts in spending.

Both the House & Senate had to vote on this deal before the 5th, which is when the Treasury Department said it would hit the X-date (The day the government would run out of money to pay its bills).

Despite all the disagreements, the House of Representatives voted in favor of the deal with a unanimous vote of 435-0. This was only possible because McCarthy made some deals and compromises to get everyone in his party on board.

The Senate also passed the deal with a vote of 63-67. They had to reject 11 changes to the deal that would have sent it back to the House for another vote. After all this drama, Biden finally signed the deal into law ahead of the new X-date of June 5. So the US dodged a default crisis (for now).

The whole deal is pretty unusual because both parties rarely agree on something in Washington these days. It also showed how divided both parties are regarding spending financial priorities. And the deal isn't the end of it. It's pretty much set the stage for future arguments about how to spend money under the new caps and how to deal with long-term debt problems.

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Implications

This agreement is important because it sets rules for how the US will handle its money for the next few years. It says how much debt can be taken on until 2025. It also guarantees that the government will keep running, even if they can't agree on a budget, by providing almost the same amount of funding as the previous year until 2023.

The deal is also cutting down on the projected deficits by a whopping $1.5 trillion over the next 10 years. That's done by cutting back on some types of spending but doesn't touch spending on social programs and defense, which are considered mandatory spending.

This deal is a big shift for Biden. It's like he's closing the book on "SPEND MORE YOLO" policy. The start of a new chapter of being more careful and specific with money is exactly what the European Commission has been recommending.

It also shows a new power dynamic in Congress. The Republicans are back in charge in the House, with McCarthy as a speaker, which means Biden may have to play nice with moderate Republicans to get things done while not paying as much attention to his party's more extreme left wing.

Finally, the deal also hits a snooze button on the next debt ceiling crisis. It won't be a problem until after the 2024 elections, which means it will be a headache for the new Congress and potentially a new president to deal with.