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04 październik 2021

How a clash over the debt ceiling in the federal budget can lead to the US government shutdown?

The US Federal Government is a tremendous machine that consists not only of the Congress, the President and the Federal courts within three branches (legislative, executive and judicial) but also of numerous agencies, departments and commissions. All of these institutions work every day in the name of the Constitution for the American people. Right now there is a looming possibility of a government shutdown that could lead to financial crises, economic recession and put the Federal Government in a very difficult position. But why could it happen? How does it look like? And did it happen before?

Author: Dominik Bochenek

 

         In the beginning, one thing has to be highlighted, the term “government shutdown” does not necessarily mean that all of the US institutions will stop working, but just non-essential Federal Services and Agencies. The shutdown occurs when the US Congress fails to approve or cannot resolve disagreements about the federal budget legislation for the upcoming fiscal year, which is the 12-month period beginning on October 1 and ending on September 30 of the next calendar year. The budget is agreed on and implemented in a couple of steps. Firstly, the President proposes a detailed budget request for the upcoming fiscal year that is developed through the conversation between federal agencies, that rely on annual funding approved by Congress, and the President’s Office of Management and Budget (OMB). Next, taking into the consideration President’s budget proposal the Congressional Budget Resolution is developed by House and Senate Budget Committees, which in the following step will be voted on in the House of Representatives and Senate. If an agreement in Congress is not reached by the start of October, there are two possibilities: one, two institutions can agree on temporary funding until the budget is agreed, or two, all non-essential discretionary functions are discontinued.

 

         Therefore, in the case of the government shutdown, all federal workers from non-essential services are sent home and will be paid retroactively for the time off, while the agencies are forced to use their saved funds. Government spending accounts for 18% of the US GDP, so there will be insufficient financial means if the shutdown is prolonged. Additionally, there will be no budget so the domestic economy will suffer. But which services will be closed? Mainly the non-essential federal services agencies are the National Aeronautics and Space Administration (NASA), Department of Housing and Urban Development, Department of Commerce (except the National Oceanic and Atmospheric Administration), Environmental Protection Agency, Department of the Interior (including National Parks), Food and Drug Administration, Department of Education, Health and Human Services, Internal Revenue Service (except those in charge of processing tax returns), Department of Labor (including the Bureau of Labor Statistics) and National Institute of Health and Department of Energy (except those that oversee the safety of the nuclear arsenal, dams, and transmission lines). These factors suggest that the activities such as processing and issuing of cards for social security payments or food inspections can be discontinued. At the same time, essential services - mostly related to public safety - such as Defense, National Safety, Security (they are set up in such a way that they can operate for several weeks without a funding bill), Border Protection and Immigration, Transportation Security Administration (TSA), US Justice Department (except for the issuance of gun permits, which is suspended), US Postal Service and Social Security, Medicare, Medicaid will continue to work. The government shutdown is not a novelty for US history, it has already occurred twelve times since 1981, with the longest duration of 35 days under the Donald Trump administration caused by a disagreement over the funding amount for an expansion of the US - Mexico border barrier.

 

         This time the debate began as soon Senate Republicans blocked a bill over the debt ceiling. Afterwards Treasury Secretary Janet Yellen warned lawmakers that the federal government will likely run out of cash by October 18 if the limit on the amount of money that the government is allowed to borrow will not be raised. The House of Representatives, controlled by the Democrats has passed a temporary continuing resolution that keeps funding federal agencies until December but the Republicans refused to back it up because it also includes a provision to raise the debt ceiling. The Republican Party is not willing to raise this limit because they say that the Democrats will use it to pay for the programs that Republicans oppose (like climate programs). The Senate Minority Leader Mitch McConnel, says he would approve spending plans but will not raise the debt ceiling (although he raised the debt limit three times with bipartisan support under the Trump administration). He wants Democrats to use their narrow majority in order to pass the piece of legislation. But Yellen raises the risk that the US could default on its debt in a matter of weeks and warns about the consequences. In turn, this will affect COVID-19 response because while federal workers can stay on the job they will not be paid until funding is approved.

 

         Shutting the government down would be a very hazardous thing to do, especially for a recovering economy during a global pandemic. To prevent it from happening Democrats will have to introduce a new resolution to the Senate and send it to the House. But there is very little time left because again as it was said at the beginning the current fiscal year will end at midnight on September 30th.

 

 

Sources:

https://www.cbpp.org/research/introduction-to-the-federal-budget-process

https://corporatefinanceinstitute.com/resources/knowledge/other/government-shutdown/

https://www.bbc.com/news/world-us-canada-58732793

https://edition.cnn.com/2021/09/28/economy/debt-ceiling-deadline-yellen/index.html