Temporarily Closed for Business

The 2013 United States Government Shutdown

Once again, the world finds itself watching the United States, interested in how it will proceed, knowing that the country’s decisions could have an astounding impact on world markets in the days to come.

February could be a very pivotal month for American lawmakers as the United States could once again approach the limit to its borrowing authority, the dreaded debt ceiling, the same limit that sent the nation into a government shutdown in October 2013.

On May 19, 2013, the U.S. reached tits $16.7 trillion debt limit and though the United States has gone to extraordinary lengths to secure funds, as of October 17, 2013, these funds were to be exhausted, and prompt action was necessary.

The debt ceiling is the total amount of money that the U.S. government can borrow in order to meet its current legal obligations. Failure to meet these obligations would mean falling short on payments to social security, Medicare, the military, tax refunds and ultimately the interest of its national debts (although Moody’s contends defaulting on these debts is unlikely as they believe the United States government would find a way to service its debts in order to maintain its credit rating).

In 2007, federal debt amounted to 63 percent of Gross Domestic Product (GDP) and grew to 102 percent of GDP in 2012. The United States was clearly headed for a crisis if the country did not find a way to ease spending, increase revenue and decrease the deficit. From October 1 – 16, 2013, America shut down for business as Congress came to an ideological stalemate and thus a political deadlock between the Democrats and the Republicans, with division in the Republican Party. It was the Tea Party Republicans who led the attempt to use the budgetary vote as a bargaining chip in a late attempt to derail the Affordable Care Act (Obamacare). Ted Cruz (R – Texas) made it clear as of last summer that he and other conservatives had every intention of blocking or delaying Obamacare before enrolment into the program began in October of 2013.

The failure to pass the spending bill led to budget sequestration. First used in the Gramm-Rudman-Hollings Balanced Budgets Act (1985), budget sequestration is used to create automatic spending cuts in times of excessive federal deficit, locking in funding at required levels to meet spending commitments. During the shutdown, the government is forced to decide which services are essential and are to continue operating. NASA, the Environmental Protection Agency, the Interior Department and national parks were among the closures, amounting to an estimated $24 billion loss.

As crisis loomed, a choice had to be made: increase the debt ceiling or face default and possibly bankruptcy? If anything was learned from the global financial crisis, it was clear that this choice was not only important for the American people but also for the world as a weakened dollar could send global markets into a downward spiral.

In December 2013, President Obama signed a compromise deal, the result of extensive negotiations by Congress, finding common ground between the Democratic and Republican poles. The compromise spending deal aimed at reducing the risks of another government shutdown, setting spending and insulating the impact of sequestration by allowing funding to increase $63 billion over scheduled levels in 2014-2015. Though the negotiations were not easy and each of the parties came to an agreement in the eleventh hour, it seems there is no end in sight for the partisan tensions, and the temporary agreement has not absolved the divisive ideological differences being displayed in the American political sphere.

December 13, 2013 was the deadline to make recommendations to the government to find savings by any means possible in order to avoid a future shutdown, or worse, default. An agreement was reached in the House, but just barely. Democrats voted 100 percent in favour of the drafted deal, but Republicans voted 87 in favour and 144 against, making the final tally 285 – 144.

The two year agreement, approved by Senate December 18, 2013 and signed by President Obama, only funds the government temporarily until January 15, 2014, and only permits the Treasury Secretary Jacob Lew to borrow until February 7, 2014, though he retains his ability to utilize accounting manoeuvres to create a buffer zone around the debt limit until mid-March. The compromise deal reached avoids increasing taxes but also avoids increasing funding to important domestic programs such as education. Increased revenue is expected to come from increased airport security fees, and by trimming areas such as federal retirement benefits.

Although the Democrats did make concessions, the Republican Party stands to lose the most as a result of this deal as they lost favour in the court of public opinion and did not achieve what they initially set out to do. This increases the uncertainty moving forward as Obamacare in particular remains unfinished business for some.

If the United States were to default, it would scare investors, create an air of uncertainty in domestic and international markets, investment in U.S. Bonds would be significantly diminished and there would be an overall decrease in economic activity across the world. The economic hiatus associated with the shutdown resulted in losses of $217 million a day in lost wages for contractors; job creation was held back an estimated 900 000 jobs; U.S. travel experienced $152 million a day losses; and consumer and political confidence eroded. During the shutdown 1.3 million workers were forced to report to work without pay, and the cost to taxpayers was $2 billion.

The shutdown also had an impact on Canada with regards to country of origin labelling, a Bombardier shipment was delayed as a result, the Agri-food and Pharmaceutical industries suffered an impact, and although proposed in an earlier version, no changes were made to Border Services/Customs.

For many people, including Canadians, who enjoy a system of universal health care, it is difficult to understand the opposition to Obamacare – a law that extends health insurance benefits to 30 million Americans who were previously uninsurable – and the lengths that will be undertaken to repeal this legislation that has already been made into law. Some small to medium business owners have gone so far as to decrease the hours of their workers below 30 hours a week in order to avoid this new mandate. The Republican camp believes that increasing spending by way of extending health care is counterproductive in times of financial instability.

With the threat of shutdown and default still very immediate, at a time when partisan politics is at its most divisive point, will the government continue to use people’s livelihoods as political leverage? Although changes are being made and compromises are being found, there is a good chance that the United States will once again reach the breaking point, exhausting its capacity to borrow and bringing about another round of budget negotiations, testing the already weary partisan political system, which may not be poised to handle the pressure of crisis once more.

There have been 17 government shutdowns since 1976, the longest occurring during the Clinton Administration from December 1995 to January 1996. Big decisions rest on the United States government and lawmakers in the coming days and months and it is imperative that the right decisions be made for the benefit of Americans and the world – rather than gambling away America’s future and the stability of markets in the name of partisan politics.