US Shutdown Warm-up to Debt Ceiling Negotiations?

US Shutdown Warm-up to Debt Ceiling Negotiations?

The Economist gave a blistering verdict on the political impasse in Congress today: “Once a stalwart of good governance, America looks like a rodeo clown”.

How has it come to this? In terms of the bare mechanics, large areas of the federal government require funding each year to operate. Typically, this funding is received through “appropriations bills” negotiated by Congress based on requests from the President. Where agreement cannot be reached in time for the new fiscal year on the exact content of the appropriations bills, federal funding is maintained at current levels through “continuing resolutions”.

This happens more often than you would think. Since Obama’s election in 2008, the number of continuing resolutions passed per year from 2008-2012 has been 4, 2, 2, 8 and 5 respectively. The last continuing resolution, signed on March 28th, kept funding constant until September 30th. Now the expiry date has arrived, but there is at yet still no agreement on either a new continuing resolution or an entirely new set of appropriations bills.

The reason for this is almost entirely political. Since the Republican Party seized control of the House of Representatives in the 2010 mid-term elections, the appropriations bills negotiations have turned from a mundane piece of Congressional bureaucracy into the single biggest domestic political issue in American politics.

Initially, Democrats and Republicans differed radically on the level of discretionary spending that should be allocated in the new appropriations bills. Democrats wanted the figure to be set at $1.058 trillion, while Republicans were fighting for a significantly reduced figure of $967.5 billion. However, the fight over the raw figures has since been hijacked by the conservative flank of the Republican Party, along with their grassroots supporters and benefactors. When House Speaker John Boehner offered a compromise figure of $988 billion two weeks ago, conservative House Republicans fought to kill the agreement.

The appropriations bills fight has now moved from a partisan debate over monetary sums between the Democrats and the Republicans, to a far more bitter dispute between separate wings of the Republican Party over the fate of Obama’s Affordable Healthcare Act (or “Obamacare”). Boehner’s compromise agreement was killed largely because it would have forced the Senate to vote not to fund Obamacare that would have almost certainly failed, thus allowing Obamacare to continue.

The latest bill by House Republicans, a new continuing resolution that would delay implementation of Obamacare by a year (based on the Republican gamble that successful midterm elections next year would give them control of both houses) was defeated 54-46 by the Senate today. The window for the House and Senate to reach an agreement has almost vanished and the prospect of the first federal shutdown since 1995 has now become reality.

Conservative Republicans argue that they are fighting to control runaway government spending in areas such as healthcare and social security. The Democrats argue that the Republican fringe is holding their own party and the entire federal government ransom to achieve their economic and political goals.

The consequences of a federal shutdown will be grave. Key government functions related to national security, public safety or agencies whose funding is written into permanent law or receive funding from other sources will continue, although employees in these areas would see their pay stop until the end of the shutdown. Hundreds of thousands of employees in areas deemed “non-essential”, ranging from civilian workers in the military to the National Zoo’s panda camera, will be told to take an unpaid holiday until the shutdown is resolved.

Beyond this, a shutdown (especially a long one) will have implications for the U.S. economy as a whole. Economists estimate that a two-week shutdown would reduce annual GDP growth by 0.3 percent, and a month-long shutdown would see a reduction as high as 1.4%. Since the annual growth of the U.S. economy has been predicted at 2.5 percent this year, this would be a significant blow.

A lack of confidence in the federal government being able to conduct its financial affairs in an orderly manner would also have knock-on effects on investment decisions, stock markets and rating agencies. When the credit rating of the U.S. was downgraded last year, Congressional infighting was explicitly mentioned as one of the justifications, and stock markets in Japan, Hong Kong, South Korea and Australia have all declined between 0.7 percent and 2 percent over uncertainly on what the next few days will bring.

The solution to the current problem remains the same as it has always been since the start of the crisis. Either one of the Republicans or the Democrats must cave, or a compromise agreement must be reached. Even then, it may not be the end. The current impasse may simply be a warm-up to negotiations on the raising of the debt ceiling.

The U.S. Treasury estimates that the current extraordinary measures used to extend U.S. debt over the current debt ceiling of $16.699 trillion will be insufficient after October 17, and a new agreement on the raising of the debt ceiling will be required before that date to ensure the money does not run out to pay the interest on U.S. government debt. With the prospect of default and financial meltdown looming if no agreement is reached, the eyes of the world will remain on Congress for some time yet.

Categories: Economics, North America

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