McCarthy says there has been some progress in US debt ceiling talks with the White House

WASHINGTON, May 25 (Reuters) – The White House and Republicans have made some progress in talks on raising the government’s $31.4 trillion debt ceiling, top Republican in Congress Kevin McCarthy told reporters on Thursday.

Talks are coming down to the wire as the Treasury warned that the government could run short of funding to cover all its spending by June 1, triggering an economically disastrous default without a deal.

Democratic President Joe Biden and House Speaker McCarthy have clashed over spending, taxes and work requirements for anti-poverty programs. But both sides say they hope to find common ground after hours of discussions in their negotiating teams on Wednesday.

“We worked well past midnight last night,” McCarthy told reporters. “I thought we’ve made some progress. There are still some outstanding issues. I’ve directed our team to work 24/7 to resolve this issue.”

Even as he made the announcement, McCarthy was preparing for lawmakers to leave Washington on Thursday for a weeklong vacation.

Time is short. If the debt ceiling is not raised, the U.S. will run out of money to pay its bills within seven days of June 1, the Treasury Department says. A US default would lift global financial markets and push the US into recession.

But the Treasury’s forecast is far from iron-clad, and some private-sector analysts believe the government could default for another week, leading some hardliners at McCarthy’s meeting to dismiss the importance of the June 1 deadline.

Asked whether the Treasury could meet its debt obligations after June 1 without a debt ceiling hike, McCarthy said: “There will always be money coming in. But I’ll leave that up to the Treasury secretary. I take June 1 as the deadline, always have.”

Ratings agency Fitch on Wednesday said it had put the US’s “AAA” debt rating on negative watch, citing growing political controversy surrounding the country’s debt ceiling. Fitch last put the US on negative watch in October 2013.

“The impatience on the debt ceiling, the failure of US officials to meaningfully address medium-term fiscal challenges … and the growing debt burden represent downside risks to US creditworthiness,” Fitch said in its report on Wednesday.

The months-long standoff spooked Wall Street, weighed on U.S. stocks and pushed up the nation’s borrowing costs. Yields on U.S. Treasury bills maturing in early June rose in early trade Thursday in a sign of investor unease.

Three days

Congress would need days to pass any deal through the Republican-controlled House and Democratic-controlled Senate. Lawmakers often have to raise the self-imposed debt ceiling to cover spending and tax cuts they’ve already approved.

Representative Steve Scalise, the No. 2 House Republican, said lawmakers in that chamber would have three days to read any debt ceiling bill before voting on it. In the Senate, any member can delay action for several days.

The House was scheduled to leave Washington for a weeklong Memorial Day recess on Thursday, although Scalise warned lawmakers to be prepared to vote in Washington if necessary.

McCarthy said any deal would have to reduce discretionary spending next year and curb spending growth in the coming years, slowing the growth of the U.S. debt, which now equals the economy’s annual output.

Biden has proposed freezing spending at current levels next year and proposing several tax increases to help control the debt.

Credit rating agency Moody’s said it could reassess its top rating for the US government if lawmakers fail to reach a deal. A prior debt-ceiling stance in 2011 prompted rival ratings firm S&P Global to downgrade its rating.

Lawmakers from both parties are reluctant to compromise. Hardline House Republicans are pushing for Biden to agree to the sharp spending cuts they passed last month. Some Democrats accuse Republicans of holding the economy hostage or else it will slow down.

“They’re looking to waste time and play games and make sure we default because somehow they think that’s going to be a political advantage,” Democratic Representative Ilhan Omar said at a news conference Wednesday.

Biden has opened talks with McCarthy over the past few weeks saying he won’t negotiate on raising the debt ceiling for months.

The federal government last defaulted in 2011, with a similar power split in Washington — a Democratic president and a Senate majority and a Republican-controlled House.

Reporting by David Morgan, Steve Holland, Andrea Shalal, Richard Cowan and Graeme Slattery; By Andy Sullivan; Editing by Scott Malone, Leslie Adler and Chisu Nomiyama

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