WASHINGTON — President Joe Biden and his Republican opponents have announced they have agreed in principle to raise the US debt ceiling and avert a default.

President Joe Biden described the agreement as a “compromise”, while House Speaker Kevin McCarthy said it “was worthy of the American people”.

The deal, after weeks of bitter negotiations, still needs to be approved by a divided Congress. The Treasury has warned the US will run out of money on June 5 without a deal.

The US must borrow money to fund the government because it spends more than it raises in taxes.

Republicans have been seeking spending cuts in areas such as education and other social programs in exchange for raising the $31.4 trillion (£25 trillion) debt limit.

Details of the tentative deal have not officially been released — but CBS, the BBC’s partner in the US, reported that non-defense government spending would be kept flat for two years and then rise by 1% in 2025.

It was unclear how exactly a government program that provides food-purchasing assistance for people on low or no incomes would change.

In a statement, President Biden described the agreement as a compromise which was good for the country “because it prevents what could have been a catastrophic default and would have led to an economic recession, retirement accounts devastated, and millions of jobs lost”.

McCarthy, for his part, referred to “historic reductions in spending, consequential reforms that will lift people out of poverty into the workforce”.

“There are no new taxes, no new government programs,” he said. McCarthy added that he planned to finish writing the bill on Sunday, before having a vote in Congress on Wednesday.

A US default would upend the US economy and disrupt global markets.

In the US, the immediate effect would be that the government would quickly run out of funds to pay for welfare benefits and other support programs, for instance.

Over a long period, the crisis would tip the US economy into recession — and this would result in unemployment rising.

A US recession would have big knock-on effects for many countries around the world, for which the US is a key trading partner — they would not be able to sell to an economy that does not buy as much.

And because the US dollar is the reserve currency of the world, a default would send panic across the world, eventually leading to prices of many commodities rising. — BBC