As lawmakers return to Washington this week, they will be brushing up against two crucial but very different deadlines at the end of September:
Funding federal agencies for Fiscal Year 2018, which begins on October 1; and
Raising or suspending the statutory debt limit, which Treasury Secretary Mnuchin has suggested must occur by September 29.
These two deadlines converge by coincidence this year. They are not related to one another and the precise consequences of failing to deal with them in a timely manner are different. Missing either of the deadlines, however, has the potential to do harm to the nation’s fiscal situation and the economy. There is certainly no good reason for provoking a standoff on either.
The Funding Deadline
About one-third of the federal budget is funded through 12 appropriations bills that need to be approved each year by Congress and the president. This funding covers the operations of all government agencies. If the bills aren’t passed by the beginning of the fiscal year (October 1) the agencies have no authority to spend money for the new fiscal year and must cease operations. This situation is known as a “government shutdown.” The last such shutdown in 2013 lasted a total of 16 days.
During a shutdown, all federal employees not designated as excepted personnel are prevented from performing their duties. Even a short shutdown can be disruptive and costly -- wasting tax dollars and diminishing public confidence in elected officials’ ability to take care of their fundamental budgetary responsibilities.
Given the limited amount of legislative days this September, avoiding a shutdown will likely require Congress to pass a “continuing resolution,” which would allow the government to continue operating at Fiscal Year 2017 levels for a set period of time. While this reliance on temporary measures makes it difficult for federal agencies and departments to plan and work efficiently, the stop-gap measure will buy Congress time to either pass all 12 outstanding appropriations bills separately or more likely an “omnibus” spending bill lumping them together for passage.
The additional time provided by a continuing resolution would need to be used to resolve the disputes that have lead to this delay in passing appropriations. At a basic level, Congress and the President will have to work in a bipartisan manner to agree on spending levels for defense and non-defense discretionary spending. Another complication is President Trump’s request for funding to begin work on a wall at the U.S.-Mexico border. Although Republicans have a majority in both chambers of Congress, Democrats have the ability to filibuster any bill in the United States Senate, thus failure to resolve these disputes will again lead us back to the threat of a shutdown.
Raising the Debt Ceiling
The federal debt limit sets the total amount of money the Treasury Department is able to borrow. Because the federal government has been running chronic deficits since the early 2000’s, it regularly must borrow more money each year to make up the difference between what policymakers decide to tax and what they decide to spend. Thus, the debt limit must regularly be increased to accommodate this additional borrowing.
It is important to realize that the debt limit, unlike government funding bills, has no impact on the nation’s fiscal policies. Rather, raising the debt limit merely allows the Treasury Department to meet the obligations set forth in policies already agreed to by Congress and the President. Failure to raise the debt limit is tantamount to refusing to pay a credit card bill after already spending the money.
While the debt limit was technically reached in mid-March, the Treasury Department has a number of “extraordinary measures” it can employ that allow the government to continue meeting its obligations for a limited time. Treasury Secretary Mnuchin has warned that these measures could run out any time after September 29th, meaning lawmakers must act before then to raise or suspend the federal debt limit.
Failure to raise the debt limit has completely different consequences from failing to pass all appropriations bills on time. The federal government refusing to pay its debts would be unprecedented and could have severe negative implications for the global economy. In 2011, when the United States came within days of a default on its debts, the federal government received the first ever downgrade in its credit rating.
A study of the 2013 debt limit impasse by the Government Accountability Office found that debt limit brinksmanship alone complicated market transactions, constrained Treasury operations, and resulted in modestly elevated borrowing costs for the federal government. While nobody knows exactly what would happen in the event of an outright refusal by the federal government to pay its bills, the previously documented consequences of a prolonged debate on the subject suggest it could have a deeply negative impact on both taxpayers the economy as a whole.
Hurricane Harvey: An Additional Complication
Both the government funding debate and the federal debt limit increase are further complicated by Hurricane Harvey. Massive natural disasters require supplemental appropriations bills to fund emergency response efforts, as well as additional funding to help rebuild from the damage later on. Given the limited amount of time Congress has before the two upcoming deadlines, it is likely that they will face pressure to merge some of their legislative work. For example, it would be a hollow gesture to approve hurricane relief but leave the government incapable of spending the money.
There are strong arguments and numerous precedents for borrowing the funds for emergency response efforts without having to offset the spending. Requiring offsets could potentially delay the federal government’s ability to provide victims with quick relief. It could also hold up negotiations on appropriations bills if members wish to reduce their funding as an offset.
Borrowing for hurricane relief efforts might also complicate the timetable for considering a raise of the debt limit because the costs of the response were not taken into consideration by the Treasury Department when making their initial projections for how long they could sustain government operations with cash on-hand. If the executive branch spends billions of dollars more than previously expected over the course of just a few short weeks, Treasury Secretary Mnuchin believes that it could deplete cash on-hand before the previously suggested deadline of September 29th.
It is thus imperative that lawmakers act quickly to fund the government, raise the debt ceiling, and provide assistance to the areas impacted by Hurricane Harvey. Failure to do any one of these actions in a timely manner could negatively impact thousands of Americans -- failing to accomplish all three would be unacceptable.
The deadline conundrum lawmakers face in September should provide an important lesson to lawmakers for the future. Proper stewardship of the budget process can make the government less costly to operate and avoids last-minute brinkmanship. Fiscal responsibility over the long term gives policymakers more flexibility to respond to emergencies and disasters when they strike.