Mnuchin Says Deal on Budget, Raising Debt Limit ‘Very Close’

(Bloomberg) -- Treasury Secretary Steven Mnuchin said the Trump administration and congressional Democrats have agreed on spending levels for a budget deal that could clear the way for raising the federal debt limit before Congress leaves town.

Mnuchin also signaled that he’d settle for a short-term increase in the government’s borrowing limit if all the budget details can’t get worked out in time, though House Speaker Nancy Pelosi has indicated she’ll resist a temporary debt limit hike.

“I don’t think the markets should be concerned” about the government running out of borrowing authority, Mnuchin told CNBC in an interview Thursday from Chantilly, France, where he was meeting with Group of Seven counterparts. “I think that everybody is in agreement.”

Pelosi, who’s pushing to strike a deal by the end of the week, also expressed optimism about her negotiations with Mnuchin.

“Nothing is agreed to until everything is agreed to, but we are on our way,” the California Democrat told reporters at the U.S. Capitol. “We have a path.”

The Treasury Department has been using so-called extraordinary measures to meet debt obligations since March 2, when the U.S. reached its $22 trillion limit on borrowing. Mnuchin has said that under one of the Treasury Department’s most conservative estimates, the U.S. will be at risk of defaulting on payment obligations in early September -- before lawmakers are scheduled to return from their summer recess on Sept. 9.

“I’ve been clear in communicating to leadership in both parties in Congress that they should raise the debt ceiling before they leave, whether it’s a permanent raise or a temporary raise, we don’t want to run into any problem in the first week of September,” Mnuchin told reporters.

Market Concerns

The market for U.S. Treasuries has been showing some signs of concern in recent weeks, with small pricing dislocations appearing around securities maturing close to potential crunch dates in September and October. The government’s $35 billion auction of eight-week bills on Thursday attracted the weakest demand at that tenor since the Treasury introduced the security, suggesting that uncertainty surrounding the debt ceiling is starting to weigh on market participants.

Mnuchin said the administration, and leaders in the House and Senate all want a comprehensive deal that includes setting budget caps and hiking the debt limit. “I think we’re very close to having an agreement.”

President Donald Trump hasn’t weighed in publicly on what he wants in an agreement, and he’s previously has scuttled agreements worked out by his advisers.

“We’re working on the debt ceiling,” he told reporters at the White House, without elaborating.

House Minority Leader Kevin McCarthy said Thursday that the leading proposal is to suspend the debt limit for two and a half years. This solution would provide an element of certainty for investors rattled by congressional brinkmanship.

“One of the concepts is to have a debt ceiling that goes for two and a half years,” McCarthy told reporters. “That would be appropriate.”

Differences Remain

However an administration official, who spoke on the condition of anonymity to discuss private deliberations, said the two sides still have more work to do on some of the key differences between Democrats and the White House on spending levels.

Democrats have said they’re concerned that White House Chief of Staff Mick Mulvaney, an advocate for spending cuts who has Trump’s ear and remains in Washington while Mnuchin is overseas, will be an obstacle.

Senate Democratic leader Chuck Schumer said his worry is that “if Mulvaney tries to be too hard on the offset side” it will kill chances for a deal. “So I hope he’ll let Mnuchin and us come to the agreement, and I think we could get it quite soon.”

Mnuchin and Pelosi have found a compromise to resolve the largest sticking point in the deal: how to handle Pelosi’s demand for $22 billion in extra spending for veterans health care, according to a Democratic aide familiar with the talks.

The deal Pelosi and Mnuchin are discussing to raise budget caps is estimated to cost more than $350 billion. The administration wants to offset about $150 billion of the spending increases sought by Democrats with cuts in mandatory entitlement programs not covered by budget caps, the official said.

Texas Mac Thornberry, the ranking Republican on the House Armed Services Committee, said resolving the spending discussion this month is better for the military than putting the negotiations at risk by insisting on more defense spending. His support for an agreement that includes less than the $750 billion the GOP sought for defense in 2020 could encourage some moderate Republicans to vote for the deal.

Fallback Plan

The White House also wants Pelosi to agree not to include attach any so-called poison pill provisions on the future spending bills to be negotiated later this fall following the budget caps deal. Trump previously complained about Democrats putting measures to thwart his priorities, such as building a border wall, on appropriations bills.

Failure to agree on a package before the House leaves for recess next week could force Congress to settle for a short-term debt limit fix to push back the date when the U.S. risks missing payments and delay the tougher discussion about spending levels.

Pelosi has said there’s little support among Democrats for a short-term debt ceiling fix if the broader negotiations fall through.

--With assistance from Justin Sink, Daniel Flatley and Alexandra Harris.

To contact the reporters on this story: Saleha Mohsin in Washington at smohsin2@bloomberg.net;Erik Wasson in Washington at ewasson@bloomberg.net

To contact the editors responsible for this story: Joe Sobczyk at jsobczyk@bloomberg.net, Laurie Asséo

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