(Bloomberg) — Republican and White House negotiators are nearing an agreement to raise the debt limit and cap federal spending for two years, people familiar with the matter say, as time is running out to avert a catastrophic U.S. default.
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According to the population, the two sides have eased their disagreements in the talks over the past few days, although the agreed details are preliminary and a final agreement has not yet been reached. Both sides still have to agree on the height of the upper limit.
Under the terms of the resulting deal, defense spending could increase by 3% next year in line with President Joe Biden's budget proposal.
The deal would also include a measure to upgrade the country's power grid to enable renewable energy, a key climate goal, while accelerating approvals for pipelines and other fossil-fuel projects favored by the Republican Party, people working with the deal said are familiar.
The deal would save $10 billion from an $80 billion budget increase for the Internal Revenue Service that Biden pushed through under his Inflation Reduction Act. Republicans have warned of a spate of agents and audits, while Democrats said the increase would be offset by less tax fraud.
What's on the horizon would be far more limited than the Republicans' opening offer, which called for a debt ceiling hike by next March in exchange for a 10-year spending cap. House Conservatives were already reluctant to accept a small deal Thursday, and the House Freedom Caucus sent a letter to McCarthy urging him to stand his ground.
An adviser to the Democratic leadership in the House of Representatives said the White House had not shared a word on spending cap agreements or IRS funding.
The New York Times previously reported that negotiators were moving closer to a debt limit agreement
Read more: Modeling US debt ceiling risk as talks X-date draws near
“We know where our differences lie,” House Speaker Kevin McCarthy told reporters in the Capitol, adding that he plans to spend the holiday weekend there.
“We don't have an agreement yet. We knew this wouldn't be easy. It's hard, but we work. And we'll keep working until we get that done,” he said.
US Treasury yields rose slightly across the board. Stocks in Japan and South Korea opened marginally higher, while Australia's benchmark was little changed. The Hong Kong market is closed for a public holiday.
Jan Hatzius and Alec Phillips of Goldman Sachs Group Inc. said in a note to investors that the chances of an agreement are highest on Friday. “Negotiators appear to be moving closer to an agreement.”
READ ALSO: McCarthy Pledges To Work On Debt Settlement Over Long Weekend
Should an agreement be reached soon, Tuesday is emerging as a likely day for a vote in the House of Representatives. The Senate would then have to act quickly to send it to Biden's desk before June 1, the date Treasury Secretary Janet Yellen said her department could run out of money.
A payment to millions of Social Security beneficiaries is due the next day, putting pressure on politicians to solve the impasse.
“I'm glad the market is closed”
Louisiana Rep. Garret Graves, one of the negotiators, described progress as “slow” as he left the office Thursday night. He said the White House steadfastly opposes Republican calls to add work requirements to eligibility criteria for Medicaid and other welfare programs.
“We have a lot of problems,” he said. “But that's one of the bigger problems.”
Rep. Patrick McHenry, a Republican from North Carolina and another negotiator, asked Thursday night what he would tell investors about the progress of the talks and quipped, “I'm pleased the market is closed.” McHenry, the chairman of the Financial Services Committee, is one of McCarthy's chief negotiators.
Fitch Ratings on Wednesday put the US AAA credit rating on a possible downgrade. The US lost its AAA rating from S&P Global Ratings during a similar partisan debate over the debt ceiling in 2011.
The White House and Treasury Department said Fitch's move shows the urgency of a quick resolution to the dispute. But McCarthy said he wasn't concerned about Fitch's announcement and that negotiators didn't need the rating agency to remind them of the importance of closing a deal.
Negotiators clashed over the scope and length of spending restraints to include in a bill raising or suspending the debt ceiling. Economists have warned that even with a deal that avoids a devastating default, limiting government spending could help push the US into recession.
– With support from Jarrell Dillard, Steven T. Dennis, Erik Wasson, Josh Wingrove and Jennifer Jacobs.
(Updates with Democratic leadership, note from Goldman Sachs, beginning in seventh paragraph. A previous version corrected fifth paragraph to state that IRS funding was part of the Inflation Reduction Act.)
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