The deal comes after weeks of bitter negotiations and needs to be approved by the Congress.

The current debt ceiling is $31.4 trillion or roughly 120 percent of the country’s annual economic output.

The debt ceiling is the threshold set by the US government on how much money the treasury can borrow.

The US Treasury has issued a warning that if a deal is not reached, the US will face a financial shortfall by 5 June.

Given that the government's expenditures exceed its tax revenues, borrowing becomes necessary to finance its operations.

In exchange for raising the $31.4tn debt limit, Republicans have been advocating for reductions in spending, particularly in areas such as education and other social programs.

In a statement, President Biden described the agreement as a compromise that 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 said he intended to finish writing the bill by Sunday before it is presented in the Senate on Wednesday for a vote.

But he faces the challenge to push it through the Senate amid likely opposition from diehards in both the Republicans and the Democrats.

Republicans control the House by 222 to 213, while Democrats control the Senate by 51 to 49.

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

A persistent crisis would push the US economy into recession - leading to an increase in unemployment.

A US recession would have big rippling effects across the globe as the US is a key trading partner for many countries around the world.

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