The US Senate has voted in favor of a crucial deal to raise the country’s debt ceiling just days before the deadline. Following the House of Representatives’ approval, the agreement will now be sent to President Joe Biden to be signed into law before Monday’s deadline.
The passage of the deal, with a vote of 63-36 in favor, comes after months of disagreement between Democrats and Republicans over America’s financial situation. Failing to meet the deadline could have resulted in a potentially catastrophic scenario where the world’s most powerful economy defaults on its national debts.
The Treasury had warned that it would be unable to fulfill all of its financial obligations on June 5th if Congress did not take action. The current debt ceiling stands at $31.4 trillion (£25.3 trillion).
Senate Majority Leader Chuck Schumer expressed relief after the deal’s passage, stating that “America can breathe a sigh of relief.” Once signed by President Biden, the bill will suspend the statutory limit on federal borrowing until January 1, 2025, which is after the next presidential election.
The terms of the deal were negotiated directly by President Biden and House Speaker Kevin McCarthy, a Republican. Despite initial concerns, few believed that the country’s politicians would allow a default for the first time in US history. However, reaching a consensus in the deeply divided Washington required finding common ground between the Republican-controlled House of Representatives and the Democrat-majority Senate.
The debt limit, which the deal aims to increase from $31.4 trillion (£25.3 trillion), will be suspended rather than set at a new level. Defaulting on the national debt would have had significant repercussions for the US and global economies, including unpaid wages for civil servants, social welfare payment disruptions, and healthcare insurance challenges. Moreover, a failure to pay interest on bonds would lead to debt payment defaults and a decline in the country’s credit rating. The US’s ability to raise money by selling bonds would also have been jeopardized. Economists warned that an extended period of payment difficulties could result in a nearly 20% drop in stock prices and an economic contraction of up to 4%.