By Steve Holland, Moira Warburton and Caroline Valetkevitch
WASHINGTON (Reuters) -U.S. House Republicans and President Joe Biden’s Democratic administration on Friday paused talks on raising the federal government’s $31.4 trillion debt ceiling, rattling financial markets as the deadline ticked closer to avoid default.
Republicans are pushing for sharp spending cuts in exchange for the increase in the government’s self-imposed borrowing limit, a move needed regularly to cover costs of spending and tax cuts previously approved by lawmakers.
Talks at the Capitol broke up around midday, and there was no immediate word on when they would resume. The Treasury Department has warned the government could be unable to pay all its bills a soon as June 1. This would trigger a default that would shake the world economy.
“We’ve got to get movement from the White House and we don’t have any movement yet,” House Speaker Kevin McCarthy, the top Republican in Congress, told reporters after his lead negotiator walked out of talks with Biden administration officials. “We can’t be spending more money next year. We have to spend less than the year before.”
A White House official said: “There are real differences between the parties on budget issues and talks will be difficult. The President’s team is working hard towards a reasonable bipartisan solution that can pass the House and the Senate.”
U.S. stocks closed the week on a soft note after news of the stalled negotiations derailed optimism that a deal could be reached soon.
Republicans control the House by a 222-213 margin, while Biden’s Democrats have a 51-49 Senate majority, making it difficult to thread the needle with a deal that will find enough votes to pass both chambers.
Democrats have been pushing to hold spending steady at this year’s levels, while Republicans want to return to 2022 levels. A plan passed by the House last month would cut a wide swath of government spending by 8% next year.
That Republican plan does not specify what spending would be cut, but some party figures have said they would shield military and veterans programs. Democrats say that would force average cuts of 22% on domestic programs like education and law enforcement, a figure top Republicans have not disputed.
Biden is in Japan attending a meeting of the Group of Seven wealthy nations, and some Republicans criticized him for taking the trip at a key point in the talks.
Biden and McCarthy spent most of the year in an impasse with the White House insisting on a “clean” increase in the debt ceiling without conditions. Republicans said they would only vote for a deal that cut spending.
They agreed to two-way talks, with the White House represented by Shalanda Young, director of the Office of Management and Budget, and Steve Ricchetti, a senior adviser, with McCarthy was represented by Representative Garret Graves.
“It could be for theatrics. It could be to put more pressure on the Democratic caucus and also take advantage of the fact that Biden is overseas. But this headline on a Friday afternoon is definitely not a positive,” Quincy Krosby, chief global strategist at LPL Financial, said in an interview.
A White House official said a deal remained possible.
“If both sides negotiate in good faith and recognize they won’t get everything they want, a deal is still possible,” the official said.
“Until people are willing to have difficult conversations about how you can actually move forward and do the right thing we’re not going to sit here and talk,” Graves told reporters as he walked out of talks on Friday.
Young and Ricchetti told reporters they were going to play it “by ear” as they departed the negotiating sessions, according to reporters for NBC News and ABC News. Biden is due to talk by phone with Shalanda and Richetti at around 9 p.m. ET (0100 GMT), according to a source familiar with the matter.
Republicans have taken a hard line. On Thursday, the House Freedom Caucus urged the Senate to vote on a previously passed House bill that would raise the limit through March in exchange for 10 years of sharp spending cuts.
House and Senate Democrats have raised concern over the inclusion in the talks of new work requirements for some federal benefit programs for low-income Americans.
The last time the nation got this close to default was in 2011, also with a Democratic president and Senate with a Republican-led House.
Congress eventually averted default, but the economy endured heavy shocks, including the first-ever downgrade of the United States’ top-tier credit rating and a major stock sell-off.
(Reporting by Steve Holland, Moira Warburton, Caroline Valetkevitch, Richard Cowan, Katharine Jackson and Doina Chiacu; Editing by Scott Malone, Franklin Paul and David Gregorio)
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