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Finance | October 1st Looms: Government Shutdown on the Horizon?

October 1st Looms: Government Shutdown on the Horizon?

Government Shutdown on the Horizon

The United States government is running out of money and the Congress appears to be on track to shut down on Oct 1 2023 if they do not approve of the spending bills as the dispute between Republicans and other lawmakers continues. As things remain right now, Congress is not expected to pass the 12 appropriation bills that fund government operations before the start of the new financial year. 

A government shutdown can have a massive impact on the U.S. economy, federal workers, and American citizens and could disrupt many federal government operations. There is little to no time left to avoid this detrimental shutdown as less than three weeks remain before government funding runs out on Sept 30. 

Given the rapidly approaching deadline, the leaders of both the Senate and the House agree that a temporary stopgap measure is necessary to avoid a Government shutdown. 

What is a Government Shutdown?

A government shutdown is the suspension of all essential services of federal agencies when the government is running out of money. Each federal agency must create its own contingency plans for an event of shutdown, including service reductions and employee furloughs. 

Besides essential services, plenty of non-essential services are also suspended including national parks, Internal Revenue Services’ customer services, and Federal Student Aid assistance. However, students can still apply for aid and all student loans are still due in October.

According to the Center for Responsible Federal Budget, programs that receive mandatory funding will still continue to operate. This includes services like air traffic control, power grid maintenance, law and enforcement, border protection, and in-hospital medical care. 

Moreover, other mandatory spending that don’t require annual appropriations will continue to function but with reduced services. These include- 

  • Social Security, Medicare, and Medicaid(Checks will continue but benefits may be suspended).
  • Supplemental Nutrition Assistance Program(Funding is mandatory but benefits may stop after 30 days of shutdown).
  • Food and Environment Inspections conducted by the Food & Drug Administration and Environmental Protection Agency will be suspended or reduced. 
  • The Centre for Disease Control and Prevention and the National Institute of Health might also witness reduced operations.
  • Government officials who provide essential services like law enforcement and air traffic control continue their operations but don’t get paid until Congress takes measures to end the shutdown. 
  • The Treasury continues to pay interest on U.S. Treasury debt on time. 
  • Applications for passports, small business loans, and government benefits can be delayed in the event of a shutdown. 

Most federal agencies are expected to prepare contingency plans if a shutdown happens. These plans are often quite specific. 

According to the Securities and Exchange Commissions, in the event of a shutdown, employees who have not been designated can choose not to volunteer to work without pay. Such voluntary services are a violation of the Antideficiency Act and will not be permitted. 

According to the Advisory Council on Historic Preservation, staff personnel will be instructed to ensure that at the end of the last day of work, electronic devices and lights that are not needed during the shutdown are momentarily turned off. 

The National Gallery of Art says it will continue its operations as long as it can tap into its income reserves, however, will have to close if the shutdown persists for long. 

Some agencies will continue their operations if they have not used the allocated funds or have reserve funds from income. 

Why Do Government Shutdowns Happen?

According to the Antideficienty Act passed in 1884 and amended in 1950, federal agencies cannot spend any money until it is approved by Congress. 

If Congress fails to pass the 12 annual appropriation bills, all federal agencies must cease all non-essential activities until Congress acts. This is known as a government shutdown. 

If Congress passes some but not all of the 12 appropriations, only the agencies that don’t receive approval shut down. This is called a partial shutdown. 

When Was the Last Government Shutdown?

Since 1976, there have been 21 government shutdowns. The most recent government shutdown started on Dec 22, 2018, and lasted until Jan 25, 2019. This was the longest shutdown that lasted a total of 34 days. However, most shutdowns barely last less than a week. 

Government shutdowns are detrimental to the country and impact the economy in more than one way. According to the Congressional Budget Office, the 2018 to 2019 partial shutdown cost the government $18 billion in federal discretionary spending and reduced the gross domestic product(GDP) by $11 billion. 

If Congress passes some but not all of the required approvals, the government goes on a partial shutdown. 

Why Does a Government Shutdown Seem Unavoidable in October 2023?

In June 2023, Congress passed and President Biden signed the Fiscal Responsibility Act with the backing of Republican leaders in the Senate and the House. This lifted the ceiling on federal debts and set limits on the annually approved spending, one for defence, and one for non-defense, for the years 2024(beginning on October 1) and 2025. 

It was expected that this would settle the overall size of the approved bills and that Congress would pass the remaining 12 bills that added up to the agreed-upon parameters. The Senate Appropriations Committee has passed all 12 appropriation bills with the agreement and cooperation of both parties. 

However, the House Republicans are seemingly not satisfied with the agreement Speaker Kevin McCarthy made with the White House and want to spend less than the amount specified in the Fiscal Responsibility Act. This was unexpected for the Democrats and the White House. The Fiscal Responsibility Act says that President Biden would veto the approved bills that are pending in the House. These House Bills also contain provisions on abortion, contraception, regulation of tobacco, and healthcare for trans people that are not likely to pass the Senate. 

In the event that the House and Senate pass different bills, a conference committee is held where the two parties are supposed to forge a compromise, which goes to a vote by each party before going to the White House. This committee is very likely to be contentious and controversial this year and there is not much time left since the end of the financial year(Sept 30). 

The Senate is expected to return on September 5 from its break, giving it four weeks to pass the 2024 fiscal appropriations. However, the House is not scheduled to return until September 12, which means there will only be three weeks left before the end of the fiscal year on September 30. 

What is a Continuing Resolution?

When Congress fails to pass all the appropriation bills for a fiscal year, it passes temporary spending bills, also known as continuing resolutions that fund all government operations until a specified time period. 

Continuing resolutions sometimes continue the same level of funding as the previous year’s appropriations. 

According to the Government Accountability Office, there were 47 continuing resolutions(CRs) between financial years 2010 and 2022. They ranged from one day to under six months. Although CRs keep the government operations running, GAO specifies that they can be harder to manage for government agencies as they often have to plan for a government shutdown and since there is no certainty that a continuing resolution will pass, they can disrupt agency hiring plans and make operations difficult. 

If the House approves a CR, it can avoid a government shutdown in October 2023. 

However, the Fiscal Responsibility Act has a feature that discourages Congress from funding the government with CRs after December 2023. If a CR is still in effect on January 1, 2024, the spending limits would be automatically revised with a hefty cut in defense spending. 

The US Government Running Out of Money in 2023

Earlier this year, instead of a shutdown, the government had a different kind of crisis with seemingly worse consequences. To put it simply, the US government ran out of money hit its debt ceiling in January and narrowly avoided a catastrophic “Default” in June that could have triggered a financial crisis. Here’s what happened- 

  • On January 19, the US government hit its $31.38 trillion debt ceiling. Once the ceiling was reached, the government was at risk of defaulting. 
  • The Treasury Department started implementing extraordinary measures shortly after so the government could fulfil its debt obligations. These measures included suspending payments on retirement and health care funds for government employees. 
  • The Treasury Department made extra measures on May 1 to fund the government until June 1, when it was expected to run out of money. These measures included suspending the supply and distribution of the State and Local Government Series Treasury securities, which are issued to states and municipalities to help comply with tax rules. These securities were counted against the debt limit. 
  • After months of negotiations, President Joe Biden and House Speaker Kevin McCarthy reached an agreement by passing the Fiscal Responsibility Act of 2023, signed by President Joe Biden on the 3rd of June. 

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What are the Consequences of the US Defaulting?

If the US government defaulted, it could have been potentially catastrophic for the nation. The only time the USA has defaulted was way back in 1979, and it was due to a technical glitch. 

However, there were instances when the government came close to defaulting: In 2011, negotiations dragged on for so long that the S&P reduced the U.S. Credit rating, which increased the volatility in the markets. 

A default that lasts longer than a few days could result in a financial crisis that will eventually affect the whole world. It could have included a sell-off of U.S. debt, selling out of money market funds, suspension of federal benefits, increased interest rates on mortgages and lending, stock market tanking, delayed tax refunds, and the plummeting of the gross domestic product. 

A default would also accelerate the arrival of a recession phase, increase interest rates, and tighten the credit requirements. 

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How to Avoid a Problem like Debt Ceiling?

The threat of defaulting that was present this year won’t be the last and it is an ever-present danger for the economy. So, how can the government such a catastrophic threat with dire consequences? One alternative to avoid future defaults is to raise the debt ceiling before the government hits the deadline or the “X-date” which is the date on which the government goes into default. 

However, it is not certain that the President has the unanimous power to raise the debt ceiling without Congress’ approval. There is also the question of the legality of such an action. 

Some other solutions to avoid defaulting include “sober finance” and “tin-hat stillness”. Other ideas that have been considered include- 

Minting the Trillion Dollar Coin

A mainstream strategy to bypass the debt limit is by having the treasury mint a trillion-dollar platinum coin and deposit it into the federal reserve. However, William Gale of the Brookings Institution says that it is uncertain whether the federal government would accept this idea or the legality of it. 

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Treasury Issues Consol Bonds to Meet Debt Obligations

Consol bonds, also known as perpetuity bonds, pay out interest and have no specified maturity date. The lack of a maturity date means these bonds would not count under the debt ceiling. 

The Fed Returns Treasury Debt Back to the Treasury

Treasury securities are a major part of the federal government’s debt. At its peak in 2022, the government held $6.25 trillion in federal debt. At the end of the year, the amount decreased to $5.9 trillion. 

Besides these options, there are some other potentially serious options to avoid defaulting. However, the best course is always the simplest one- Congress acts, and the President signs. 


Frequently Asked Questions(FAQs)

Q.1 What happens if the United States of America defaults?

If the US fails to pay back its creditors and goes into default, it will escalate to higher interest rates. Mortgage rates, loan rates, credit card rates, and more will become more expensive. Moreover, a default will be detrimental to the economy and could be the spark to ignite a phase of recession. 

Q.2 How much money does the United States government owe?

According to the Bureau of Labor Statistics, over the past 100 years, the United States federal debt has increased from $408 billion in 1922 to $30.93 trillion in 2022.

Q.3 Is Gold a good choice if the U.S. defaults on its debt?

Gold and other precious metals are generally considered safe investments. If the debt ceiling is not raised before the X-date and the U.S. federal government defaults on its debt obligations, investors will turn to gold and other precious metals to protect their wealth.