What’s in the debt ceiling deal, and why it matters, explained

Kevin McCarthy surrounded by reporters
US House Speaker Kevin McCarthy speaks to members of the media at the US Capitol in Washington, DC, on May 30, 2023. Republican and Democratic leaders scrambled on May 29 to secure congressional support for a bill aimed at avoiding a US debt default. | Mandel Ngan/AFP via Getty Images

How the legislation to avert an economic crisis would affect student loans, food aid, the IRS, and more.

House Republicans took the debt ceiling hostage — but now Speaker Kevin McCarthy has agreed to set the hostage free for a relatively small ransom payment.

The deal struck by negotiators for President Biden and McCarthy on Saturday night is no major overhaul of American public policy. The White House managed to avert sweeping cuts to domestic spending, which will instead effectively be held at something close to the status quo (though a cut when accounting for inflation). And on a set of other policy issues where Republicans made big demands, Democrats granted only some limited concessions.

The deal certainly includes some policy changes progressives do not like — they’d prefer domestic spending not be cut at all, and they dislike new work requirements for food stamp beneficiaries ages 50 to 54, among other things.

But if you keep in mind that Democrats and Republicans were always going to have to negotiate over spending levels at some point this year (to avert a government shutdown this fall), it’s not clear that Republicans’ use of the debt ceiling as a bargaining chip even got them anything they wouldn’t have won later anyway.

Rather than an extremist GOP’s attempt to force Democrats into unthinkable concessions or else trigger an economic crisis, the outcome here looks a whole lot like an ordinary congressional deal reached with the help of an imminent deadline.

Can such a deal pass the GOP-controlled House? There has been some grumbling from the right, though few are talking about an outright revolt against McCarthy. The bill could face a challenge in getting to the House floor because of the House Rules Committee, where McCarthy granted some seats to the far right. But there are ways around that, and if the bill does make it to the House floor, it will likely pass with a combination of Democratic and Republican votes, and Senate passage is a sure thing.

If House Republicans can get to yes, it will signify a shift in the party compared to the last major debt ceiling showdown in 2011. Back then, the GOP majority brought to power in the Tea Party wave sought extreme spending cuts, including big changes to Medicare and Social Security. That GOP conference also proved chaotic and nearly ungovernable by its leaders.

Yet true-believing anti-spending ideologues have seen their influence dwindle in the Trump and post-Trump eras. GOP leaders decided early on not to demand any Medicare and Social Security cuts in these talks, and the eventual deal leaves Medicaid untouched, too.

Most in the party would still like to be seen as spending cutters, but in practice the energy is around culture war fights. That made the current deal — which uses various gimmicks and accounting tricks that will let Republicans claim they made substantial cuts to domestic spending, while letting Democrats avert many of the actual consequences of those cuts — possible.

The Biden White House, meanwhile, deflated liberal commentators’ and activists’ pleas that the president use executive authority in some way to effectively raise the debt ceiling on his own. Officials saw various practical, legal, and political drawbacks that made them very reluctant to go down that road. Instead — after climbing down from an initial stance that they wouldn’t negotiate at all — Biden’s team engaged with Republicans in hopes they could get a reasonable deal. And they think they’ve succeeded.

Here’s what’s in the deal. —Andrew Prokop

How big are the budget cuts?

The deal negotiated by the Biden White House and House Republicans cuts some domestic programs in 2024 and limits spending growth to 1 percent in fiscal year 2025. That will still amount to a cut, after accounting for inflation.

Almost two-thirds of the $6 trillion federal budget is mandatory spending on programs like Social Security, Medicare, and Medicaid that will happen without any action by Congress. The rest is determined by Congress, and that is the bucket that will be affected by the debt limit deal.

The cuts are going to land disproportionately on programs that help the poor and on administration, which also affects the people who rely on government programs. Some discretionary spending — on the military and for veterans — is actually going to increase. But the rest, including funding for child care, low-income housing, the national parks, and more, will be subject to a cut for the next two years.

The exact cuts are supposed to be set by legislation that Congress will pass later this year. Should lawmakers fail to pass those spending bills, automatic spending cuts of 1 percent across the board would occur instead. (The incentive for Congress to pass the spending bills is that these automatic cuts would include the military, which all parties involved want to exempt.)

Assorted accounting tricks could also reduce the actual spending cuts and hold federal spending effectively flat — though in a time of inflation, flat spending is really a cut when considering the purchasing power of each dollar.

This might sound familiar: In 2011, an earlier debt limit crisis led to the Budget Control Act of 2011, which set spending caps for the rest of the decade. In this case, the spending limits apply only for two years.

And while this cut is shallower than the automatic cuts of the last decade, it applies to programs that already have been feeling the squeeze: According to the Center on Budget and Policy Priorities, spending for discretionary domestic programs (excluding veterans’ health care) is 10 percent below 2010 levels when adjusted for inflation and increases in the US population.

The long-running neglect has led to shortages in the services they provide. Child care assistance has fallen for the better part of two decades. The primary grant program served 373,000 more children in 2006, even though now there are an additional 1 million American children living in poverty. Likewise, 3 out of 4 US families that should be eligible for federal housing assistance don’t actually receive any aid because there is no funding available. Cuts to the Social Security Administration have been going on for years, while wait times for assistance have been increasing. Investments in water infrastructure have been stagnant, even after clean water crises in Flint, Michigan, and Jackson, Mississippi.

Cuts were inevitable — even to social programs that were already underfunded — once Republicans took control of the House and therefore the appropriations process. The question was always how much of the major programs Democrats could protect given Republican threats to hold the debt ceiling hostage. —Dylan Scott

What are the new work requirements, and what are they likely to do?

The debt ceiling deal includes increased work requirements for the Supplemental Nutritional Assistance Program (SNAP, commonly known as food stamps) and Temporary Assistance to Needy Families (TANF, or cash welfare), both of which already include substantial work requirements.

One thing notably missing? Work requirements for Medicaid, which had been a key demand of House Republicans.

SNAP has a set of general work requirements, and a narrower set of requirements for nondisabled adults without dependents. The changes in the new deal concern the latter. Currently, childless adults between the ages of 18 and 49 who do not have a physical or mental condition affecting their ability to work are generally required to work or volunteer for 80 hours a month. If they fail to, they face a time limit: They can only receive SNAP benefits for a maximum of three months over a three-year period. The debt ceiling deal expands the age range for these rules to apply to 50- to 54-year-olds.

While that change may not seem significant, it could have a major impact on people applying for disability support unable to work. People get sicker in their 50s, and SNAP has historically been a major source of support for applicants during the long process of applying for disability benefits.

Possibly offsetting these changes are new exemptions from work requirements for houseless people, veterans, and former foster children. A White House official told CNN that because of these exemptions, the total number of people subject to work requirements will be roughly the same after the bill. Advocates for SNAP counter that many houseless people and veterans should have already been exempt from work requirements under current law, which is being misapplied.

TANF, meanwhile, was created by the 1996 welfare reform law, replacing a program that offered guaranteed cash for low-income parents with a block grant giving $16.5 billion annually to states to spend on anti-poverty programs (though in practice the money is used for all manner of things). Because its appropriation has never been adjusted for inflation over its 27 years of existence, the program has effectively been cut in half over time, and now only about 21 percent of poor families with children get help from it.

States getting money from TANF have to meet a work-participation standard, requiring that 50 percent of families and 90 percent of two-parent families receiving benefits are working. However, these percentages can be reduced if the state has seen its TANF caseload fall over time (or if the state reports spending more of its own funds than is required by federal law), which is known as a “caseload reduction credit.” Thirty-two states have used these credits to reduce the work participation percentage they have to hit on TANF to 0 percent, as of fiscal year 2021.

Currently, these credits are calculated by seeing how much caseloads have fallen relative to fiscal year 2005, meaning states can get credit for nearly two decades of reductions. The debt ceiling deal changes this baseline to fiscal year 2015, which is laxer than what Republicans wanted (fiscal year 2022).

While in theory this could incentivize states to push TANF recipients toward work, the last time a change like this was tried in 2005, it did not result in a higher share of recipients due to states exploiting other loopholes. In other words, while the new policy undoubtedly tries to chip away at the welfare state, its actual impact may be a bit muted. —Dylan Matthews

What does the student loan provision mean for borrowers?

Here’s the bottom line: You’re probably going to need to start paying back your student loans again at the end of this summer. The pause on loan payments, and the hold on interest accruing on that debt, is set to end after August 29, with interest on loans beginning to accrue again on August 30, if the current proposal becomes law. That’s 60 days after June 30 — the same deadline that the president and the Education Department had set for repayments to begin, if the Supreme Court had not made a final decision on the Biden administration’s student loan forgiveness plan by then.

The court still hasn’t made a pronouncement on that plan, though a decision is expected in June — and it’s not likely to be positive for the nearly 43 million Americans who owe some kind of student debt. Should they rule against the plan, the debt ceiling deal would prevent the president from issuing a ninth extension of the payment pause, which began in March 2020. —Christian Paz

What actually changes about energy permitting?

The biggest surprise of the deal might be its approval of the 300-mile Mountain Valley Pipeline, which will carry natural gas from West Virginia to southern Virginia.

The pipeline, held up for years by federal lawsuits, has long been a top priority for Sen. Joe Manchin. But the pipeline’s role in debt ceiling talks largely flew under the radar. The deal would give a green light to outstanding permits for the pipeline and shields its construction from court intervention, to the frustration of environmentalists worried about the pipeline’s impact on rural and low-income areas and the 1,000 streams and wetlands along its way.

There are a few other modest changes to permitting for energy projects in the deal, mostly affecting the bedrock 1970s-era environmental protection law, the National Environmental Policy Act. It sets a one-year deadline for agencies to complete an environmental assessment, and a two-year deadline for the more thorough environmental impact statement, an expensive review requiring community input. (Progressives argue that, rather than time limits, federal agencies need more staffing to complete reviews quickly.)

Neither Democrats nor Republicans are going to walk away from the debt ceiling compromise feeling satisfied. House Republicans didn’t get a majority of their demands, such as fast-tracking fossil fuel infrastructure and repealing clean energy tax credits in the Inflation Reduction Act. Democrats didn’t get any major wins in expanding transmission lines, an important piece of infrastructure for the clean energy grid. Instead, the deal agrees to a study on transmission, punting the bigger issues holding back transmission lines to another time. —Rebecca Leber

What’s up with unspent Covid aid?

Republicans have been fixated for a while on clawing back money that Congress authorized during the pandemic but that has not yet been spent. They secured a win in the debt-limit deal, with the White House agreeing to reclaim some of that funding in the name of reducing spending.

The deal exempts some of remaining Covid funding, including money set aside to fund a next generation of vaccine development as well as funding that pays for Covid vaccines and treatment for uninsured Americans. “It is really important that these were protected,” said Jennifer Kates, director of global health at KFF.

Obviously, billions of dollars have been spent over the past three years on assistance to people and businesses, as well as funding for vaccines and other public health efforts. So what’s left? There has not been a thorough public accounting for what money is left for specific projects, according to Kates. But with the pandemic winding down and important funding streams unaffected, public health experts don’t sound too worried about this aspect of the deal. —DS

Are the IRS cuts symbolic or significant?

The scope of the IRS funding cuts in the debt ceiling deal was notable: Roughly $20 billion of $80 billion that Congress previously approved will be repurposed for other programs in 2024 and 2025. This will help Democrats offset some of the deal’s cuts to domestic spending.

White House officials have told Reuters that the short-term impact could actually be minimal, however, since the funding for the agency was approved over 10 years. Effectively, that means that the IRS might not feel these funding cuts in the near term, and that lawmakers could put in more requests for agency funding when needed in the future.

Making these cuts, though, allows Republicans to claim a win on the issue: They’ve long targeted the IRS and argued that its resources should be clawed back. —Li Zhou

You May Also Like