The countdown is on. The new fiscal year of the United States begins on October 1 and Congress has not yet approved the laws that enable spending for the new year. The Speaker of the House of Representatives, Kevin McCarthy, has failed to secure support from the hard-right Republican wing, who, spurred on by former president Donald Trump, have rejected his proposals. Twenty radical lawmakers are demanding drastic spending cuts that neither a part of the Republican Party nor the Senate, which is controlled by the Democrats, are willing to accept. Congress only has this week to reach an agreement, a feat that appears difficult to achieve. Even the alternative of issuing a stopgap funding package is currently blocked, which means the government is headed into a shutdown — federal agencies will stop all actions deemed non-essential, and millions of federal employees, including members of the military, won’t receive paychecks. The White House is already preparing for the worst.
The GOP holdouts were not satisfied with the launch of an impeachment inquiry into U.S. President Joe Biden. McCarthy saw it as the price to pay to gain points among the hardliners, but it did not do much to help. The House speaker is hostage to the hard wing of his own party, which previously rebelled against him when he agreed with Biden to suspend the debt ceiling for two years. That agreement established some moderate spending cuts and was a great victory for Biden. The deal implied that the spending items for the new year would be approved by Congress, but now that it is time to do so, the hard-right faction is putting up a fight.
“They’re back at it again, breaking their commitment, threatening more cuts and threatening to shut down government again,” said Biden during a recent speech in suburban Maryland, recalling that he had already made an agreement with McCarthy. “Now, a small group of extreme Republicans don’t want to live up to the deal. So, now everyone in America could be forced to pay the price. Let’s be clear. If the government shuts down, that means members of Congress — members of the U.S. military are going to have to continue to work and not get paid. A government shutdown could impact everything from food safety, to cancer research, to Head Start programs for children. Funding the government is one of the most basic responsibilities of Congress. And it’s time for Republicans to — Republicans to start doing the job America elected them to do.”
The Republicans have a slim majority in the House of Representatives (222 to 212), meaning McCarthy depends on the votes of the hard-right faction. The alternative would be to a make a deal with the Democrats, but if this happens, the extremists would remove McCarthy as House speaker. Of the dozen laws needed to maintain the government functioning normally, McCarthy has not even been able to secure support for the annual Pentagon spending legislation, which usually has the broadest consensus. His spending bill was defeated twice last week due to some of the hardliners, who want funding to support Ukraine against the Russian invasion to be cut back.
Republicans have begun processing a package of bills in the lower house to finance the departments of Defense, Homeland Security, State and Foreign Operations and Agriculture. The bills will be voted on Tuesday, when lawmakers return. But eight more laws are still pending, and even those don’t have guaranteed support. Normally, it takes weeks or months of negotiations and amendments to process these bills, which have to be approved by both Chambers and signed by the president, but time is running out.
Former president Donald Trump is egging on the holdouts from the sidelines. “A very important deadline is approaching at the end of the month. Republicans in Congress can and must defund all aspects of crooked Joe Biden’s weaponized government that refuses to close the Border, and treats half the country as enemies of the state. This is also the last chance to defund these political prosecutions against me and other Patriots. They failed on the debt limit, but they must not fail now. Use the power of the purse and defend the country!” he posted Thursday on Truth Social, his social network.
With less than a week to spare, the only chance to avoid a government shutdown would be a temporary extension. House Republicans have presented a proposal — a so-called continuing resolution — to temporarily enable spending until October 31. But this stopgap bill is opposed by the Republican hard right — who want it to include measures to crack down on immigration on the U.S.-Mexico border and cuts to the Department of Justice and the FBI to complicate the investigations into Trump — and by the Democrats, as it introduces spending cuts beyond what was agreed. There is one last possibility to avert a shutdown: Republican and Democrats in the Senate (where the GOP hardliners have no influence) could approve its own continuing resolution and send it to the lower house, where it could go forward with the support of the moderates of both parties.
The Biden administration’s budget office has begun advising federal agencies to review and update their shutdown plans. Federal employees could be informed this week if they will be temporarily laid off. Millions of federal workers, including the military, would not be paid even if they continue working until the spending bill is approved. Social Security checks, however, will still go out. If there is a shutdown, federal agencies would be forced to suspend all non-essential activity, which would compromise inspections, authorizations, grants and all kinds of policies.
The president and members of Congress will continue to work and get paid, but members of their staff who are not considered essential would be suspended. The judiciary could continue to function for a limited time thanks to remaining funds and other spending items. Although the Republican hardliners want to hamper the efforts of the three special counsels appointed by Merrick Garland (who are investigating Trump, Joe Biden and his son, Hunter Biden), in principle they would not be affected by a federal shutdown, because they are paid for through a permanent, indefinite appropriation, an area that’s been exempted from shutdowns in the past.
“A shutdown would have devastating impacts on essential programs that millions rely on for their health and safety,” said Bobby Kogan, senior director of Federal Budget Policy at the Center for American Progress (CAP). “From Head Start preschool centers to having safe drinking water, a government shutdown could put essential programs that our communities rely on in danger. A government shutdown could create unnecessary uncertainty for millions that rely on these programs everyday.”
It would also have an impact on the U.S. economy, although the toll it takes will largely depend on how long it lasts. “The chances of a government shutdown this fall are more likely than not, but we think it will have only a slight impact on output — around 0.2ppts of annualized GDP per week — with half of that impact being reversed. Overall, it is unlikely to have a material impact on Q4 GDP, but it does come at a time when we think the economy will be shrinking,” analysts at Oxford Economics stated in a report.
A federal shutdown would prevent the publication of employment and inflation statistics, which the Federal Reserve refers to when it sets interest rates. If it affects activity and cools demand, it is possible that the central bank will skip the 0.25 point rate rise that it planned for before the end of the year.
A shutdown occurs when a budget is not approved before the beginning of the new fiscal year. The issue stems from former attorney general Benjamin Civiletti, who argued that government agencies cannot legally operate without approved funding in a series of rulings issued in 1980 and 1981. Since then, only spending for activity essential to public safety and constitutional obligations is allowed.
Since 1976, there have been 22 shutdowns, 10 of which have resulted in workers being laid off. The significant shutdowns occurred during Bill Clinton’s presidency, when then-House speaker Newt Gingrich and his conservative majority demanded budget cuts. The longest shutdown, however, occurred between 2018 and 2019, when then-president Trump and congressional Democrats entered into a stalemate over Trump’s demand for funding to build a wall on the U.S.-Mexico border. The stalemate took place in the middle of Christmas and lasted 35 days. It was, however, only a partial shutdown because Congress had approved appropriations laws for some areas.
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