US Debt Ceiling Compromise Reached: Inflation Reduction Act Protects Economic Recovery

After weeks of dithering, the outcome is near. US President Joe Biden announced on Sunday that the compromise reached on the debt ceiling with Republican leader Kevin McCarthy was ready for consideration by Congress. The text will be voted on Wednesday by the House of Representatives, with a Republican majority, and then by the Senate, with a Democratic majority. The two parties have until June 5 to ratify this text, a date beyond which the federal government may no longer be able to make payments, according to the US Treasury Department. On Sunday, both Kevin McCarthy with the Republicans and Hakeem Jeffries, his counterpart with the Democrats, declared that their respective parties should approve the text. But as long as it is not definitively adopted, there is always a risk, however slight, that the agreement will collapse.

“I think this is a very important step forward and it removes the threat of a catastrophic default”, Joe Biden said Saturday at a press conference. This text “protects our economic recovery”he continued, while acknowledging that the agreement is “a compromise, which means no one got everything they wanted”.

Inflation Preservation Reduction Act

The agreement reached by Joe Biden and Kevin McCarthy includes the suspension of the debt ceiling until January 1, 2025, a spending limit in the 2024 and 2025 budgets, as well as the reallocation of Covid-related relief measures not -used. At the White House, it is estimated that this text “protects the historic economic gains we have made, truly allowing one of the strongest recoveries on record to continue by eliminating the threat of default through 2025”. Above all, it protects a set of achievements such as the Chips act, aimed at defending the American industry on semiconductors and the IRA, the Inflation Reduction Act, the law on the reduction of inflation including numerous tax incentives in favor of the greening of the economy.

The American markets being closed on Monday, this announcement did not cause any particular enthusiasm in Europe. After opening higher, the Euro Stoxx 50 finally ended the session down 0.4%.