Two pressing political issues in the U.S.—a government shutdown and increasing the debt ceiling—are confronting investors and policymakers. While they are truly independent issues, they are being linked politically as both parties use them as leverage in the ongoing negotiations for two pending spending bills for infrastructure and social programs.
Looming government shutdown
If Congress fails to agree on a federal budget or a temporary stop-gap measure known as a Continuing Resolution by October 1, certain government functions will shut down.
There have been 21 government shutdowns ranging from one to 35 days since the current budget process was instituted in 1976. During these periods, non-essential employees are furloughed, while most safety and security work continues.
Debt ceiling likely to be reached around mid-October
Every president since Herbert Hoover has presided over increases in the debt ceiling and added to the national debt. There have been 78 occurrences since 1960, or more than one increase a year on average.
The debt ceiling restricts the government from borrowing—that is, issuing debt—to meet spending priorities. It does not necessarily stop government operations nor does it actually restrict spending, which are authorized in the appropriations process. If federal revenue streams are sufficient, the government may continue normal operations. If not, then the U.S. Treasury will be unable to pay expenditures that have already been incurred. However, the U.S. Treasury has discretion over certain payments and can prioritize the timing so as to avoid a default for a brief period.
Most recently, in August 2019, Congress passed the 2020 budget that funded government spending and suspended the debt ceiling for two years, until August 1, 2021. Yesterday, Treasury Secretary Yellen estimated that the timing of payments could extend the deadline to about October 18.
Both parties appear hardened in their positions, making a government shutdown a growing possibility. Nevertheless, nothing prevents Congress from quickly passing a Continuing Resolution before October 1—however brief—that would buy more time to negotiate a budget deal. Similarly, it looks as if a budget to avoid a government shutdown and increasing the debt ceiling will be negotiated together politically, albeit passed separately.
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