The budget battles in Washington, D.C., are back in the news. The rhetoric blasting from both major parties can be confusing, because it is actually two separate issues: One fight is over a budget for the fiscal year that begins Tuesday, and a related clash about raising the debt ceiling, which will be reached Oct. 17. Failure to resolve each issue would effectively lead to a government shutdown.
Congress has until Tuesday to agree to a fiscal year 2014 spending plan. The government will undergo a “shutdown’’ if the Congress fails to reach an agreement, where all but the most essential services for safety will cease until a compromise is reached. Over the last 40 years, there have been almost 20 short shutdowns of nonessential government operations due to budget impasses.
The most well-known shutdown occurred in 1995-96 when President Bill Clinton clashed with House Speaker Newt Gingrich. At that time, the government was shuttered for a total of 28 days. While there is a lot of loose talk about the risk of another recession – or even a depression – from a short shutdown, that is not a likely outcome this time around.
In spring 2013, the Obama Administration warned of a severe economic slowdown due to sequestration – mandatory federal spending cuts totaling $85 billion which was passed by Congress and signed by President Obama in 2011. In fact, the economy barely noticed those spending cuts. The experience from 1995-96 also raises doubts that a short shutdown would lead to a recession. At that time, rather than a recession the economy enjoyed a sustained boom. Most important, Congress is already working on a short-term plan to keep the government funded while discussions over the ultimate shape of the budget continue.
The bigger fight will be over the debt limit, which is more than $16 trillion and will be eclipsed around Oct. 17. At that point, the administration will not be able to legally issue any new public debt. In practice, it means the government would only be able to spend as much as it generates in tax revenues. Given the present budget deficit of some $700 billion, Washington would be required to initiate deep spending cuts in order to bring the budget into balance immediately unless the debt ceiling is raised. The lack of action by lawmakers, though, would not result in a “default” by the federal government, as Congress has the ability to pay interest on its existing debts and to borrow to replace debt coming due.
In prior debt ceiling negotiations, Congress has been able to secure spending cuts from the Obama Administration by hanging tough. While most of the cuts are just a reduction in projected growth rates, the 2011 debt ceiling deal led to the sequestration deal and actual spending cuts. President Obama has said he would no longer negotiate with Congress even though in 2006 as a senator he called increasing the debt limit a “failure of presidential leadership.” By not negotiating with Congress, it is hard to reach any conclusion except that he was right.
In an era of divided government, protracted budget negotiations should be expected. One important sticking point remains funding the Affordable Care Act, which was passed strictly along a party-line vote. Under our U.S. Constitution, Congress has the responsibility to set the spending priorities of the country. The 113th Congress was elected and re-elected in response to the partisan rewriting of the social contract.
It is likely that there will be a bipartisan repealing of parts of the Affordable Care Act, perhaps the tax on medical devices or the exemption for Congress and its staff from the law. A shutdown – if any – is likely to be brief. For the debt ceiling, it is hard to envision Congress approving a spending plan and then not approving the debt needed to support it and our nation.
Timothy F. Kearney, Ph.D., is assistant professor and chair of the Department of Business at Misericordia University in Dallas, Pa. Misericordia University is the first four-year college in Luzerne County