What is included in the debt settlement

America is a little closer to averting a self-imposed economic crisis.

President Biden and Speaker Kevin McCarthy, the leader of the Republican House, announced yesterday that they had reached a deal to increase the amount of money the government can borrow. The deal includes caps on federal spending, additional work requirements for food stamps and social services, and reforms to build energy projects faster. All in all, it’s the kind of spending deal that Democrats and Republicans have agreed to several times over the past few decades.

But the agreement is remarkable because this time the country has come so close to disaster. The Treasury Department has warned that US money will run out as early as June 5 – in just a few days. At that point, the federal government could be forced to default on its debts, potentially triggering a global financial crisis (eg this newsletter has explained).

The bill’s approval in Congress is not guaranteed. Today’s newsletter explains the deal between Biden and McCarthy — and the most important thing that could still go wrong.

An agreement between two parties

The final agreement is a compromise. Many Republicans wanted sharper cuts, and many Democrats didn’t want cuts. The deal ended up in between. “I don’t think everyone will be happy at the end of the day,” McCarthy said Thursday. “That’s not how this system works.”

First, the deal would raise the two-year debt limit. This shifts any future fight over the debt limit to after the 2024 election.

The spending limits central to the agreement target federal programs in addition to Social Security, Medicare, Medicaid and the military, such as education, scientific research and border security. The limits wouldn’t actually reduce spending, but are meant to make it grow more slowly than inflation and the economy. This arrangement allows both sides to claim a victory of sorts: Republicans can call it a cut since spending will grow more slowly than it otherwise would have. And Democrats can say they have prevented actual cuts.

The deal would also recoup some of the funds previously allocated to the Internal Revenue Service to crack down on wealthy tax evaders. Under the deal, some of the IRS funds could be used to soften other cuts. That reflects the bipartisan nature of the talks, with both sides winning: Republicans get to claim they successfully cut IRS funding, and Democrats get to use the money to soften other cuts they never wanted.

Likewise, the reforms allowed in the deal could allow for more clean energy projects, a Democratic priority, but also more oil and gas projects, favored by Republicans.

One last hurdle

The big question now: will the deal go through? The right flank of the House Republicans has a lot to say. Those legislators have a history of going to great lengths to block spending deals they disapprove of. They could do that again, and they have enough power to nullify the deal because McCarthy only has a nine-vote majority.

McCarthy has tried to prevent a mutiny by involving some of the most conservative members in debt reduction talks and placing them in leadership positions. But there’s no guarantee they’ll stick with him, especially if they feel he went too far in his concessions to the White House.

There are two leading scenarios. In one, far-right Republicans vote against the deal but let it pass, and McCarthy gets the needed votes from Democratic lawmakers willing to support compromise legislation with Biden. That result would justify McCarthy’s approach to the speakership: by bringing his most conservative members into the fold, he has dissuaded them from taking more drastic action.

In the other scenario, far-right Republicans are essentially blocking the deal. They could vote on whether or not to impeach McCarthy as speaker, and because Republicans have such a narrow majority in the House, McCarthy could lose. (Remember: it took McCarthy 15 ballots to win the speakership in the first place.)

Conservative Republicans might refrain from such a move to avoid being blamed for the aftermath, said my colleague Carl Hulse, chief correspondent for The Times in Washington. If the federal government defaults on its debts and an economic catastrophe ensues, it will be clear that the hard right allowed this to happen by blocking a deal that a majority of lawmakers were willing to pass.

With that scenario in mind, conservative Republicans may be able to pass a deal even if they vote against it.

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THE WEEK AHEAD

What to watch out for

Tomorrow is Memorial Day in the US.
DeSantis will hold his first in-person presidential campaign event in Des Moines, Iowa, on Tuesday.
The Scripps National Spelling Bee Finals will be held Thursday.
Monthly US employment data will be released Friday.

What to cook this week

The recipes in this edition of Five weekday dishes, Emily Weinstein’s newsletter, all work for Memorial Day weekend gatherings and the days that follow. This barbecue chicken on the stove makes a cookout favorite without a grill; orecchiette salad uses halloumi, a cheese that scorches nicely, for croutons; and that of Kenji López-Alt dry pickled salmon calls for pre-salting the fish – a trick that results in crispy skin and juicier meat.