The incoming President Trump hopes to include raising the debt ceiling in a temporary funding bill to keep the U.S. federal government running until March 14 next year, a move that has been blocked by the Democratic Party in Congress. If Congress fails to pass a viable temporary funding bill soon, most government agencies may temporarily shut down by midnight on December 20 (this Friday). So, what does this outcome mean? What impact could a government shutdown in the United States have?
The fiscal year in the United States runs from October 1 to September 30 of the following year. Congress is supposed to allocate funds to 438 government agencies before October 1 of the fiscal year to keep the federal government running smoothly.
However, lawmakers in Congress rarely complete the full fiscal year appropriations task by October 1 and usually pass a temporary funding bill to keep the government operational for a period while they work on the next stage of appropriations legislation.
The current temporary funding bill is set to expire on December 21 (Saturday). Both parties in Congress have proposed extending the deadline to March 14, but Trump strongly opposes this version of the funding bill, accusing the Democrats of setting a “trap.”
At the same time, Trump wants to include a proposal to raise the debt ceiling in the new version of the temporary funding bill, which is also being opposed by the Democrats.
If lawmakers in Congress fail to draft a new temporary funding bill in time and get it passed in both the Republican-controlled House and the Democratic-controlled Senate before midnight on Friday (December 20), most of the government’s funding will run out, forcing a government shutdown.
The debt ceiling is the limit set by Congress on the amount of money the U.S. government can borrow. Because government spending exceeds tax revenues, lawmakers need to address this issue regularly – a politically challenging task as many are reluctant to vote for increasing debt.
Under the 2023 budget agreement, the U.S. Congress suspended the debt ceiling until January 1, 2025.
Trump hopes to resolve the debt ceiling issue now so that he doesn’t have to deal with it after taking office on January 20 next year. One of his top priorities upon returning to the White House will be to extend the tax-cut policies implemented during his first term.
According to some tax experts cited by Reuters, Trump’s tax-cut policies would increase the U.S. federal government’s current $36 trillion debt by approximately $4 trillion over the next ten years.
However, Trump does not believe his tax-cut policies would lead to such a high increase in debt. He is also committed to reducing the federal debt, but his primary approach is to cut federal spending rather than the tax-increase policies adopted by the Democrats. Additionally, Trump promotes tax cuts to stimulate economic development, expanding the tax base and thus increasing government tax revenue under lower tax rates.
Congress set a debt ceiling of $45 billion for the first time in 1939 and has had to raise it 103 times since then due to federal spending consistently exceeding tax revenues. As of October this year, public debt accounted for 98% of the U.S. Gross Domestic Product (GDP), compared to 32% in October 2001.
If action is not taken to raise the debt ceiling, the Treasury may be unable to pay off the debt. A U.S. debt default could have serious consequences, including disrupting global financial markets and plunging the U.S. into a recession.
To avoid a U.S. debt default, Congress sometimes quietly raises the debt ceiling, and sometimes lawmakers use this opportunity to engage in intense debates on fiscal policies before ultimately raising the debt ceiling at the last minute.
According to the Congressional Research Service, the U.S. federal government has experienced 14 shutdowns since 1981, many of which lasted only a day or two. The most recent and longest shutdown occurred during Trump’s first term when he and Congress disputed border security issues, leading to a partial government shutdown from December 2018 to January 2019 for 35 days.
During a government shutdown, hundreds of thousands of federal employees may be placed on unpaid leave, impacting a range of services from financial oversight to garbage collection in national parks.
Other essential federal employees will continue to work but will not receive pay. Services like mail delivery and tax collection will remain in operation.
A shutdown lasting just a few days has minimal actual impact, especially if it occurs over a weekend. However, if federal employees start missing paychecks two weeks later, then there may be broader economic repercussions.
Goldman Sachs stated that a one-week government shutdown would directly reduce the GDP growth rate by around 0.15%. However, after the shutdown issue is resolved, the GDP growth rate would see a growth of a similar magnitude.
According to data from the Congressional Budget Office, the 35-day shutdown from 2018 to 2019 caused approximately $3 billion in economic losses, equivalent to 0.02% of the GDP.
Each department and agency of the U.S. federal government has an emergency plan to determine which employees must continue working without pay.
During the 35-day shutdown from 2018 to 2019, approximately 800,000 out of 2.2 million federal government employees were placed on unpaid leave, as reported by Reuters.
The Department of Homeland Security’s 2022 shutdown plan required 227,000 out of 253,000 employees to continue working, including border security personnel and the Coast Guard.
In its 2021 emergency plan, the Department of Justice stated that 85% of its 116,000 employees would be considered essential, including prison staff and prosecutors. Criminal proceedings would continue, but most civil lawsuits would be suspended.
Air travel is expected to remain relatively smooth, but during past shutdowns, the Transportation Security Administration warned that the rate of airport security officers calling in sick might increase.
It is currently unclear whether all of the 63 national parks in the U.S. will remain open. During the 2013 shutdown, some national parks were closed by the Obama administration for safety reasons, resulting in an estimated loss of $500 million. During the 2018-2019 shutdown, the Trump administration kept national parks open but closed public restroom facilities and visitor centers, and halted waste disposal.
In the past, the IRS placed up to 90% of its employees on temporary leave during a government shutdown, but according to the current emergency plan, all employees are deemed essential.
All military personnel will continue to work, but approximately 429,000 civilians at the Pentagon will be placed on temporary leave.