A crunch deal to raise the US debt ceiling has been voted through by the House of Representatives.
The agreement – which aims to avert a potentially catastrophic scenario where the US defaults on its national debts – passed through the Republican-majority House by 314 to 117 votes.
The proposal will now move to the Senate. The Senate’s majority leader, Chuck Schumer, has vowed to move quickly to pass the bill.
It needs to be on President Joe Biden’s desk by Monday’s deadline – the point at which the US federal government is expected to run out of money to pay its bills.
“This agreement is good news for the American people and the American economy,” Mr Biden said after the vote.
“I urge the Senate to pass it as quickly as possible so that I can sign it into law.”
Image: The deal comes after an agreement was reached between Republican Mr McCarthy and Democrat president, Joe Biden
What is the debt limit – and why does it matter?
The main aim of the deal is to increase the US debt limit from $31.4trn (£25.3trn) – which it achieves by suspending the borrowing limit until January 2025 rather than setting a new level.
It also averts a situation where the US defaults on its national debts – a scenario that would have huge impacts both for the US and the wider world economy.
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US Treasury secretary Janet Yellen previously warned that without a deal to suspend the debt ceiling, the US would not have enough money to meet all of its financial obligations by 5 June.
That would mean civil servant wages, social welfare payments, and health insurance would go unpaid.
Crisis gets kicked down the road – but is a ‘moment of reckoning’ to come?
American politics has a strange ability to create a sort of manufactured jeopardy, which then has the prospect of becoming a self-fulfilling prophecy.
Few really believe that the country’s politicians will actually allow the nation to default for the first time in its history.
But this game of chicken is going to the wire – both sides unwilling to move, even to negotiate, until the last minute to eke out concessions.
And to be clear, it is a game which can go wrong – and if a default did happen, it would be a global crisis.
The vote overnight, for the deal – to raise the debt ceiling – means the crisis is a little closer to being avoided.
Congressmen and women found consensus in a deeply divided house to vote for the deal which had been hammered out by President Biden and his political foe, House speaker Kevin McCarthy, over the past few days. It passed 314 to 117.
But in their pre-vote speeches, it was clear that many, many politicians have deep reservations about the level of unsustainable debt.
Yes, they were relieved that the deal allows bills to be paid, it protects the country’s credit rating, medical care is protected as is social security.
But, “a moment of reckoning is coming”, one Republican warned. Another said the level of debt is “totally unsustainable and irresponsible”.
Some Republicans celebrated concessions they got, which will impose spending caps and place checks and balances on the executive branch of government.
But the consensus was that it wasn’t perfect or even good for anyone. But that’s the price of such divided politics.
The bill now heads to senators. They may want amendments, but are likely to pass it. Crisis is then averted. This game of chicken over. Debt ceiling raised. Can kicked down the road.
If the US no longer pays interest on its bonds – IOUs it issued to raise funds – it would default on debt payments and its credit rating would fall.
A vital way the country raises money – selling bonds – would also be at risk due to the insecurity will markets would charge more to lend to the US.
Economists warn that a prolonged period where the US cannot pay its bills would lead to a nearly 20% drop in stock prices – and an economic contraction of up to 4%.
Bipartisan deal
Wednesday’s vote comes after Mr Biden and leader of the House of Representatives, speaker Kevin McCarthy, reached an agreement over the country’s debt ceiling.
In order to secure the agreement, the Democrats were forced to make concessions to the typically pro-small-state Republicans, including spending cuts and policy concessions.
In a speech before the vote, Mr McCarthy praised the bill’s budget cuts, which he said were needed to curb Washington’s “runaway spending”.
Despite his praise of the deal, it drew opposition from 71 hardline Republicans. That would normally be enough to block partisan legislation, but 165 Democrats backed the measure and pushed it through.
Global financial markets gave a clear vote of no-confidence in President Trump’s economic policy.
The damage it will do is obvious: costs for companies will rise, hitting their earnings.
The consequences will ripple throughout the global economy, with economists now raising their expectations for a recession, not only in the US, but across the world.
While the UK’s FTSE 100 closed down 1.55% and the continent’s STOXX Europe 600 index was down 2.67% as of 5.30pm, it was American traders who were hit the most.
All three of the US’s major markets opened to sharp losses on Thursday morning.
Image: The S&P 500 is set for its worst day of trading since the COVID-19 pandemic. File pic: AP
By 8.30pm UK time (3.30pm EST), The Dow Jones Industrial Average was down 3.7%, the S&P 500 opened with a drop of 4.4%, and the Nasdaq composite was down 5.6%.
Compared to their values when Donald Trump was inaugurated, the three markets were down around 5.6%, 8.7% and 14.4%, respectively, according to LSEG.
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Worst one-day losses since COVID
As Wall Street trading ended at 9pm in the UK, two indexes had suffered their worst one-day losses since the COVID-19 pandemic.
The S&P 500 fell 4.85%, the Nasdaq dropped 6%, and the Dow Jones fell 4%.
It marks Nasdaq’s biggest daily percentage drop since March 2020 at the start of COVID, and the largest drop for the Dow Jones since June 2020.
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5:07
The latest numbers on tariffs
‘Trust in President Trump’
White House press secretary Karoline Leavitt told CNN earlier in the day that Mr Trump was “doubling down on his proven economic formula from his first term”.
“To anyone on Wall Street this morning, I would say trust in President Trump,” she told the broadcaster, adding: “This is indeed a national emergency… and it’s about time we have a president who actually does something about it.”
Later, the US president told reporters as he left the White House that “I think it’s going very well,” adding: “The markets are going to boom, the stock is going to boom, the country is going to boom.”
He later said on Air Force One that the UK is “happy” with its tariff – the lowest possible levy of 10% – and added he would be open to negotiations if other countries “offer something phenomenal”.
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3:27
How is the world reacting to Trump’s tariffs?
Economist warns of ‘spiral of doom’
The turbulence in the markets from Mr Trump’s tariffs “just left everybody in shock”, Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions in Boston, told Reuters.
He added that the economy could go into recession as a result, saying that “a lot of the pain, will probably most acutely be felt in the US and that certainly would weigh on broader global growth as well”.
Meanwhile, chief investment officer at St James’s Place Justin Onuekwusi said that international retaliation is likely, even as “it’s clear countries will think about how to retaliate in a politically astute way”.
He warned: “Significant retaliation could lead to a tariff ‘spiral of doom’ that could be the growth shock that drags us into recession.”
It comes as the UK government published a long list of US products that could be subject to reciprocal tariffs – including golf clubs and golf balls.
Running to more than 400 pages, the list is part of a four-week-long consultation with British businesses and suggests whiskey, jeans, livestock, and chemical components.
Meanwhile, Prime Minister Sir Keir Starmer said on Thursday that the US president had launched a “new era” for global trade and that the UK will respond with “cool and calm heads”.
It also comes as Canadian Prime Minister Mark Carney announced a 25% tariff on all American-imported vehicles that are not compliant with the US-Mexico-Canada trade deal.
He added: “The 80-year period when the United States embraced the mantle of global economic leadership, when it forged alliances rooted in trust and mutual respect and championed the free and open exchange of goods and services, is over. This is a tragedy.”
Tanking stock markets, collapsing world orders, devastating trade wars; economists with their hair ablaze are scrambling to keep up.
But as we try to make sense of Donald Trumps’s tariff tsunami, economic theory only goes so far. In the end this surely is about something more primal.
Power.
Understanding that may be crucial to how the world responds.
Yes, economics helps explain the impact. The world’s economy has after all shifted on its axis, the way it’s been run for decades turned on its head.
Instead of driving world trade, America is creating a trade war. We will all feel the impact.
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0:58
PM will ‘fight’ for deal with US
Donald Trump says he is settling scores, righting wrongs. America has been raped, looted and pillaged by the world trading system.
More from US
But don’t be distracted by the hyperbole – and if you think this is about economics alone, you may be missing the point.
Above all, tariffs give Donald Trump power. They strike fear into allies and enemies, from governments to corporations.
This is a president who runs his presidency like a medieval emperor or mafia don.
It is one reason why since his election we have seen what one statesman called a conga line of sycophants make their way to the White House, from world leaders to titans of industry.
The conga line will grow longer as they now redouble their efforts hoping to special treatment from Trump’s tariffs. Sir Keir Starmer among them.
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President Trump’s using similar tactics at home, deploying presidential power to extract concessions and deter dissent in corporate America, academia and the US media. Those who offer favours are spared punishment.
His critics say he seeks a form power for the executive or presidential branch of government that the founding fathers deliberately sought to prevent.
Whether or not that is true, the same playbook of divide and rule through intimidation can now be applied internationally. Thanks to tariffs
Each country will seek exceptions but on Trump’s terms. Those who retaliate may meet escalation.
This is the unforgiving calculus for governments including our own plotting their next moves.
The temptation will be to give Trump whatever he wants to spare their economies, but there is a jeopardy that compounds the longer this goes on.
Image: Could America’s traditional allies turn to China? Pic: AP
Malcolm Turnbull, the former Australian prime minister who coined the conga line comparison, put it this way: “Pretty much all the international leaders I have seen that have sucked up to Trump have been run over. The reality is if you suck up to bullies, whether it’s global affairs or in the playground, you just get more bullying.”
Trading partners may be able to mitigate the impact of these tariffs through negotiation, but that may only encourage this unorthodox president to demand ever more?
Ultimately the world will need a more reliable superpower than that.
In the hands of such a president, America cannot be counted on.
When it comes to security, stability and prosperity, allies will need to fend for themselves.
And they will need new friends. If Washington can’t be relied on, Beijing beckons.
America First will, more and more, mean America on its own.