US government shuts down as budget couldn’t be passed

October 5, 2013

Screenshot_2 Having unable to pass the annual budget, the US government has been shut down for the first time in past 17 years. The Democratic Party failed to break the impasse over the contentious President Barack Obama’s health care law which is the central issue behind the opposition.

Why has the US government shut down happened?

The US Congress failed to pass the budget due to disagreement between the Republicans, who have majority in the lower house – the House of Representatives – and the Democrats, who control the upper house, the Senate.

Since President Barack Obama’s election, the parties have never come to a resolution on a US budget that extends further than a few months. They’ve just negotiated around the margins and come up with short-term fixes.

Now, the Republicans are using budget deadlines to gain political leverage over contentious policies.

This time the issue was Mr Obama’s healthcare reform programme- the Patient Protection and Affordable Care Act (Obamacare) continues to be very controversial for a range of reasons. The Republican-controlled House of Representatives though approved budgets but eliminated funding of this programme or wanted it delayed by one year. The Senate rejected these demands. It lead to a deadlock situation and no budget bill could be agreed by both houses, resulting into the shut down.

How would US government shut down impact the US?

The shutdown affects more than 700,000 federal employees which have been furloughed with no guarantee of back pay once the deadlock is over. National parks, museums, federal buildings and services will all be closed. Pension and veterans’ benefit cheques could be delayed.

However, workers like teachers, firefighters and doctors will continue to be paid, as they are paid for by the state, not the federal government.

What could be economic impact of the US government shut down?

The impact would depend on how much time it takes for Congress to reach an agreement on the budget.

In past 30 years, the US government has experienced 18 shutdowns the latest in 1995, costing the economy over $1bn. As per IHS estimates, the daily cost in lost output will be just $300m if the shutdown lasts only a few days, which is too small for an economy whose annual output is 52,000 times bigger.

However, the daily impact of the economic shutdown may rise if it affects confidence and consumer spending, especially with hundreds of thousands of workers left unpaid.

As per Goldman Sachs estimate, if the shutdown were to last about 3 weeks or so, it could deplete 0.9% from US GDP this quarter.

It would also affect tourism with difficulties in renewing passports and driving licences thus hitting the transport and travel industries.

The government workers may also have to draw from their savings or postponement mortgage payments and any other spending until unpaid leave ends.

The main concern is if the shutdown extends to mid-October, when the legislative branch has to agree on raising the federal government’s borrowing authority. Congress will need to meet a crucial deadline on October 17, 2013 to raise the government’s $16.7 trillion debt ceiling – the limit at which it can borrow money to pay its bills.

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