Government Shutdown

Ex-Treasury official: Stalemate could trigger US recession

Ex-Treasury Official: Political stalemate 'unnecessary'
Ex-Treasury Official: Political stalemate 'unnecessary'

If the political stalemate in Washington impedes an agreement on raising the debt ceiling, it could send the U.S. economy back into a recession, former Treasury official Mark Patterson told CNBC on Wednesday.

Washington was officially shut down on Tuesday, marking the first U.S. government closure in 17 years and sending hundreds of thousands of government workers home, after politicians failed to renew the federal budget into a new fiscal year.

(Read More: Shutdown may last week; budget talks possible: Boehner aide)

Patterson, the former chief of staff to the Secretary to the Treasury Jacob Lew, said a brief closure would likely have a minor impact on the world's largest economy's gross domestic product, but a longer closure would present a different level of issues.

"If [the shutdown is] allowed to persist and it really affects confidence, or it gets too close or merges with the debt ceiling debate - and God forbid we actually have a problem getting the debt ceiling lifted - then obviously it's a different ball game altogether," said Patterson.

"If the debt ceiling doesn't work out as it should then you could see serious negative economic effects [on the U.S. economy] including a potential return to recession," he added.

Most industry commentators agree that although the current budget freeze is costly and disruptive, the bigger risk for the U.S. government is a potential stalemate over raising the government's borrowing authority once it reaches its $16.7 trillion limit on October 17.

(Read More: Shutdown is nothing: Debt ceiling debacle could be real ugly)

A failure to come to an agreement on this issue, could lead to the Treasury defaulting on its debt payments. Last time Congress came close to forcing a Treasury default in July 2011, it cost the U.S. its Triple-A credit rating, even though no payments were missed.

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Patterson said the failure by U.S. government to agree on funding was a bad sign for progress on the debt ceiling. A long running disagreement over funding for President Barack Obama's Affordable Care Act, otherwise known as 'Obamacare,' has been the major source of the stalemate.

(Read More: Money for nothing: Shutdown costs $12.5 million per hour)

"Right now we're not able to solve just the government funding problem, so to merge these two very thorny issues together, which politicians are having a hard time grappling with, is not a recipe for success in my opinion," said Patterson.

"The stakes are pretty high and the frustrating thing is that it's really unnecessary. The solution is easy to see. Congress can easily pass a bill to re-open the government and raise the debt ceiling today if the will was there," he added.

(Read More: Economic nail-biter hammers US consumer sentiment)

The Treasury has said it will have just $30 billion left in the coffers by October 17, most likely not enough to cover government spending as its bills typically reach $60 billion a day.

Patterson told CNBC the $30 billion figure "sounded about right."

"It sounds like a lot of money but in the context of the federal budget it's not. That's essentially running on fumes," he said.

"You wouldn't want $3 in your check book if you have a lot of checks outstanding," he added.

The U.S. economy expanded at a rate of 2.5 percent from April to June, up from 1.8 percent in the first quarter.

— By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie