What’s happened?

On June 3rd the president, Joe Biden, signed a bill that temporarily suspends the federal government’s US$31.4trn debt ceiling in exchange for spending cuts and other changes. This followed rushed negotiations in Congress, during which both houses ultimately passed compromise legislation. The bill prevents an unprecedented US default, which otherwise could have occurred as soon as June 5th.

Why does it matter?

This outcome aligns with our expectation that lawmakers would approve a last-minute compromise bill, viewing a default as too economically and politically costly. A bipartisan coalition of lawmakers endorsed the measure, which passed comfortably in the House of Representatives (the lower house) and more closely in the Senate (the upper house). The bill reflects an agreement struck between Mr Biden, a Democrat, and the Republican House speaker, Kevin McCarthy, following lengthy deliberations. It allows for a two-year suspension of the borrowing limit, delaying the next potential debt-ceiling stand-off until after the 2024 elections. It also includes a two-year cap on discretionary spending, claws back funding to support tax collection and the coronavirus recovery, tightens requirements for social programmes, and facilitates permitting for large energy projects.

The bill’s bumpy, albeit rapid, approval highlighted tensions among Republicans that have been simmering for months. Mr McCarthy was reliant on Democrats to pass the bill, despite efforts to frame it as a victory for his party; more Democrats voted for it in both houses than Republicans. Republicans also accounted for over half of the opposing votes, with hardliners criticising the bill’s spending cuts as too modest. Mr McCarthy’s failure to unify his party could jeopardise his hold on the speakership—only one vote is needed to begin ousting him. However, such a manoeuvre would probably fail to win the required majority of House votes to succeed. Republicans have also downplayed the likelihood of such a vote, discouraging further signs of disunity ahead of what will be a divisive Republican presidential primary.

Mr Biden will benefit from better optics. The bill maintains climate investments in his Inflation Reduction Act, and keeps Medicare, Medicaid and Social Security intact. Mr Biden will frame these as victories during his re-election campaign, while using the bill to reinforce his image as a capable broker of bipartisan agreement. However, he will face protests from progressive Democrats who preferred more drastic action, such as declaring the debt ceiling unconstitutional. This could encourage Mr Biden to explore options for such a move, but it will remain politically risky and legally complicated.

What next?

We expected that a last-minute agreement would avert a default, therefore our forecasts are unchanged. With neither party completely satisfied, the debt ceiling will remain a contentious issue, including during the 2024 elections.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the economic, political and policy outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.