White House, GOP appear closer to deal to avert debt ceiling crisis

Facing mounting pressure ahead of a potential June 1 deadline, negotiators are zeroing in on a deal to raise the debt ceiling for two years — through the 2024 presidential election — in exchange for two years of new spending limits mostly focused on domestic government programs, three people familiar with the matter said, speaking on the condition of anonymity to reflect the private talks.

Buoying the optimism around an emerging agreement, the Biden administration agreed to long-standing GOP demands to pare back some of the $80 billion in new funding Congress approved last year for the Internal Revenue Service, the people said. The administration agreed to the GOP demands so officials could redirect as much as $10 billion from the IRS to shield other domestic programs from the steep cuts sought by Republicans.

But even as a deal came into focus, fierce new objections emerged from both the left and the right — with a stampede of conservatives throughout the day vowing to stop a deal they said would not cut federal spending by enough. Some people close to the talks emphasized that key issues remained unresolved, and it was possible a deal could fall apart before an agreement could be finalized.

Still, lawmakers and White House aides appeared to find the way to unlock what had become the biggest sticking point in the talks. Republicans had demanded that the government spend less money next year than it did this year on a portion of the budget covering domestic programs, while also insisting on substantial increases for the military and border security. Democrats balked at these demands, since they would lead to huge cuts to federal programs such as nutrition aid, housing assistance, education and scientific research.

To resolve this impasse, negotiators agreed to slightly decrease spending on these domestic programs — giving House Speaker Kevin McCarthy (R-Calif.) a key victory — while redirecting money from other parts of the federal budget, such as the IRS funding, which would effectively keep domestic spending flat for next year, according to two of the people familiar with the matter. Spending on veterans and the military will rise in line with the increases sought by the president’s budget, one of the people said.

Many of the details of the emerging deal were first reported by the New York Times. Negotiators have not resolved whether or how to approve new energy permitting reform or new work requirements for federal aid programs, the two people familiar with the matter said.

“They have a framework in place, and while there’s haggling over the work requirement nobody thinks that’s going to get in the way,” said one other person briefed on the deal, who spoke on the condition of anonymity to reflect private conversations.

The talks would not affect Social Security or Medicare, two of the biggest drivers of federal spending, as Republicans and Biden alike said earlier this year they would not make changes to those programs.

Any measure to reduce the IRS funding approved in last year’s Inflation Reduction Act could alarm Democrats in Congress and around the country. Biden and his party had trumpeted the $80 billion last year, saying it would help improve enforcement actions against wealthy tax cheats and also improve the agency’s customer service.

But the White House may now argue it represents the least dangerous outcome of the debt ceiling talks. Depending on exactly what it means to increase border security, the military and veterans affairs, McCarthy’s demands could have amounted to cutting critical domestic programs starting in October by at least 8 percent — or possibly as much as 12 percent, when adjusting for inflation, according to nonpartisan budget experts.

The emerging agreement aims to reduce those programs’ spending by far less.

“The President and his negotiating team are fighting hard for his agenda, including for IRS funding so it can provide better customer service to taxpayers and crack down on wealthy tax cheats,” Michael Kikukawa, a White House spokesman, said in a statement.

The government risks running out of money as soon as June 1 if the $31.4 trillion debt limit isn’t raised before then, Treasury Secretary Janet L. Yellen has warned.

As funds run short, Treasury asks agencies if payments can be made later.

Earlier in the day, President Biden said talks were moving along, adding, “I believe we’ll come to an agreement.”

“Speaker McCarthy and I had several productive conversations, and our staffs continue to meet as we speak and we’re making progress,” he said in the Rose Garden of the White House. “I made clear time and again, defaulting on our national debt is not an option.”

One of McCarthy’s chief lieutenants in the talks, Rep. Patrick T. McHenry (R-N.C.), told reporters the negotiations were “closer” but remained “sensitive.” He said he did not expect a deal to come together by Thursday night.

“I think we’ve had an airing from the White House, Democrats, by Republicans,” he said Thursday afternoon. “I think all those concerns are very well known, very well understood, and quite accounted for, which is the reason why we’re still here at the 11th hour, fighting about serious things of serious consequence.”

Negotiators had to contend with a group of hard-right Republicans who appeared furious that spending restraints wouldn’t be steep enough.

“Someone explain to me why that’s an off-ramp that should be taken now,” Rep. Chip Roy (R-Tex.), an influential member of the far-right House Freedom Caucus, told reporters. “I think it’s an exit ramp about five exits too early.”

Some predicted a free fall of support for the final compromise beyond just the roughly three dozen far-right members of the Freedom Caucus.

“That would absolutely collapse the Republican majority for this debt ceiling increase,” Rep. Bob Good (R-Va.) said.

Also Thursday, Gen. Mark A. Milley, the chairman of the Joint Chiefs of Staff, warned that the effects of a default might threaten military readiness and national security.

“I think there’s no doubt whatsoever that there would be a very significant negative impact on the readiness, morale and capabilities of the United States military,” he said, adding that the nation’s reputation abroad would suffer.

Former president Donald Trump weighed in on the talks as well, saying at his golf course in Virginia that he had spoken to McCarthy.

“I think he’s doing a really good job. Tough situation,” Trump said. “They spent too much money — way, way too much money on nonsense. It’ll get worked out.”

Democrats have argued that Republicans allowed trillions of dollars in new debt to pile up during the Trump administration and are only now holding back on raising the debt ceiling because Biden is in office.

Even as negotiators say talks have been “productive,” they are in danger of running out of time.

Treasury officials say the government might be unable to cover all its payment obligations as soon as June 1. Other estimates say the “X-date” might come sometime in early June, but few analysts think there’s much more than a couple of weeks to maneuver.

Two prominent credit rating agencies warned that they could downgrade the U.S. government’s coveted AAA debt rating in the event of a default. Morningstar noted in a research report Thursday that it has placed U.S. debt in review “with negative implications,” noting that it could decide on a downgrade even if there is a deal. Fitch similarly said Wednesday evening that it is watching U.S. debt because of “debt ceiling brinkmanship.” Morningstar said it expected a deal and that any default would probably be over soon. A downgrade in 2011, when the nation narrowly averted a default, ended up costing more than $1 billion in higher interest in the following years.

Stocks were mixed Thursday as the negotiations moved along slowly. Wall Street has been wary of the prospect of default, but prominent financial leaders such as JPMorgan Chase chief executive Jamie Dimon have said they expect a deal before then.

If negotiators do reach an agreement, it would still need to be written into a bill and that takes time. House rules pushed by conservatives as McCarthy sought the speakership in January require 72 hours for lawmakers to review legislation before they can vote.

Both chambers would need to vote, which could take days. At that point, the deadline could be down to hours. On Thursday morning, Sen. Mike Lee (R-Utah) said on Twitter that any deal “will not face smooth sailing in the Senate” if it doesn’t include “substantial spending and budgetary reforms,” promising to “use every procedural tool” available to him to delay it.

The Senate is on a break, and McCarthy sent House members home Thursday for Memorial Day weekend, though they’d remain on notice to return if a deal comes together.

The administration’s negotiators — including Biden confidant Steve Ricchetti, Office of Management and Budget Director Shalanda Young and White House liaison to Congress Louisa Terrell — have stayed mum.

Other Democrats are continuing to worry about what an eventual deal might involve. In a Wednesday news conference held by the Congressional Progressive Caucus, its chair, Rep. Pramila Jayapal (D-Wash.), said she was concerned Biden would end up making concessions that she would not agree with.

Dan Lamothe, Mariana Alfaro, Camila DeChalus, Rick Maese and Aaron Gregg contributed to this report.