US Debt Deal. Republican, White House Moving Closer To Raise Limit, Cap Spending For Two years: Report

Under the terms of the emerging agreement, defence spending would be permitted to rise 3 per cent next year in line with President Joe Biden’s Budget request

The deal would cut $10 billion from an $80 billion Budget increase for the Internal Revenue Service that Joe Biden won as part of his Inflation Reduction Act.

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Negotiators from the Republican and White House are moving closer to deal to raise the debt limit and cap federal spending for two years, citing sources news agency Bloomberg reported on Friday. According to the report, the two sides have narrowed differences in talks over recent days though the details agreed to are tentative and a final accord is still not in hand. The two sides have yet to agree on the amount of the cap.

Under the terms of the emerging agreement, defence spending would be permitted to rise 3 per cent next year in line with President Joe Biden’s Budget request. Sources privy to the development told Bloomberg that the accord would also include a measure to upgrade the US’ electric grid to accommodate renewable energy, a key climate goal, while speeding permits for pipelines and other fossil fuel projects that the GOP favours.

The deal would cut $10 billion from an $80 billion Budget increase for the Internal Revenue Service that Biden won as part of his Inflation Reduction Act. Republicans have warned of a wave of agents and audits, while Democrats said the increase would pay for itself through less tax cheating.

What is taking shape would be far more limited than the opening offer from Republicans, who called for raising the debt ceiling through next March in exchange for 10 years of spending caps. House conservatives were already balking Thursday at the notion of a small deal, with the House Freedom Caucus sending a letter to McCarthy demanding he hold firm.

An adviser to the House Democratic leadership said the White House had not shared any word about agreements on spending caps or IRS funding.

According to The New York Times, earlier that negotiators were closing in on a debt-limit deal. “We know where our differences lie,” House Speaker Kevin McCarthy told reporters at the Capitol, adding that he planned to work through the holiday weekend there. "We do not have an agreement yet. We knew this would not be easy. It’s hard, but we’re working. And we’re gonna continue to work till we get this done," he said.

US Treasury yields across the board edged higher. Shares opened marginally higher in Japan and South Korea, with Australia’s benchmark little changed. Hong Kong’s market is closed for a public holiday. 

Jan Hatzius and Alec Phillips of Goldman Sachs Group Inc. said in a note to investors that odds were highest for an accord to be reached on Friday. "Negotiators appear to be closing in on an agreement."

Should a deal be reached soon, Tuesday is emerging as the likely day for a House vote. The Senate would then have to act quickly to send it to Biden’s desk before June 1, the date by which Treasury Secretary Janet Yellen has said her department could run out of cash.

Fitch Ratings on Wednesday placed the AAA credit rating for the US on watch for a potential downgrade. The US lost its AAA grade at S&P Global Ratings during a similar partisan standoff on the debt ceiling in 2011.

The White House and the Treasury said the Fitch move demonstrated the urgency of reaching a speedy resolution to the dispute. But McCarthy said that he wasn’t worried about Fitch’s announcement, and that negotiators didn’t need the ratings agency to remind them of the importance of concluding a deal.

Negotiators have been clashing over the scale and length of limits on spending to be included in a bill raising or suspending the debt ceiling. Economists have warned that even with a deal that avoids a devastating payments default, caps on government outlays could help to tip the US into a recession.