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How the government shutdown may be averted, for now

Storm clouds fill the sky over the U.S. Capitol Building in Washington, DC.
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Storm clouds fill the sky over the U.S. Capitol Building in Washington, DC.

Unless Congress acts before Wednesday at midnight, the U.S. government — once again — will officially run out of the legal authority to spend money.

The threat of a government shutdown has been looming for months, and some political analysts believe that last week's surprise resignation by House Speaker John Boehner has reduced the odds that the government will grind to a halt Thursday.

But a spending bill now working its way through the legislative process would only keep the government funded through mid-December — roughly when the Treasury Department is expected to hit the so-called debt ceiling and run out of borrowing authority.

That deadline will set up another showdown — this one with a new speaker running the show in the House — that could inflict even more fiscal chaos and force federal agencies to suspend services and send government workers home.

Political observers are already handicapping the odds the presumptive new speaker, current Majority Leader Kevin McCarthy, R-Calif., will use the occasion to prove his conservative credentials to his House colleagues.

"He's going to have to make some promises to Republicans in the conservative wing of the House caucus that he's not going to roll over to Democrats and Obama," said CNBC contributor Ben White. "As his first act, he's not going to cut a deal with Democrats."

Here we go again.

Why is this happening?

Congress is supposed to pass a budget every year — usually through multiple spending bills for various government agencies and functions — well before the end of the fiscal year, which falls on Sept. 30. When the process breaks down — as it's done frequently in the past decade — the only way to keep the government funded is through what's called a continuing resolution. That measure is basically Congress' way of saying, "Just keep spending what you're spending for a few more weeks or months, and maybe we can pass a real budget by then."

The current CR runs out — at midnight Wednesday.

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What happens if Congress doesn't act? Does the whole U.S. government come to a grinding halt?

Each department prepares a list of who is subject to furlough.

It's a long list, but generally speaking, it's business as usual for the most essential functions of government: Social Security checks would go out, troops would continue serving (though some might have to wait to get paid). NSA agents would keep snooping on phone calls, TSA screeners would keep examining bags at airports and air traffic controllers would show up for work, along with food safety inspectors, border patrol and federal prison guards, most FBI agents, doctors and nurses at VA and other federal hospitals, and any federal emergency and disaster relief workers. The Postal Service and Federal Reserve, which don't rely on Congress for funding, aren't affected.

On the other hand, the disruption — even if a shutdown lasts only a few days — would be painful and widespread. Some benefits, like unemployment insurance and veterans' benefits could be delayed or reduced. National parks, museums and many passport offices would shut down; the SBA and FHA would stop guaranteeing new loan applications; farm subsidy checks stop flowing and IRS tax processing would slow down, among other headaches.

But if Congress can't control spending, isn't it time for extreme measures like this?

In a word, no. In fact, after several rounds of tax increases and spending cuts, Congress has done a decent job controlling spending in the short term. The federal deficit (the gap between what it collects in taxes and spends on programs) shrank from $1.4 trillion in 2009 to $484 billion in fiscal 2014. The economic recovery also has helped boost government revenue.

On the other hand, Congress has done nothing to control the longer-term deficits that are coming if no changes are made in big entitlements like Social Security and Medicare. Those deficits are still several years away so there's time to reform the tax code and fix Social Security. There's also evidence that the rapid rise in Medicare costs is slowing, one of the main goals of the Affordable Care Act.

In any case, the disruptive impact of shutting down the government and eventually getting it started again actually costs more money.

How much?

Estimates of the overall economic impact are difficult to make, largely because some of the fallout would be indirect.

In January 2014, the Bureau of Economic Analysis estimated the direct impact of the last shutdown, in October 2013, lopped about three-tenths of a percent off real gross domestic product growth in the 2013 fourth quarter. That was in line with estimates from private economists, who figured the impact of the shutdown came to, at most, a few tenths of a percent of GDP.

The 16-day shutdown also sidetracked the creation of an estimated 120,000 new jobs, according to a report from the Council of Economic Advisers.

The immediate impact would be felt by government workers, whose paychecks would be suspended and jobs would be subject to furlough. In October 2013, those furloughs amounted to 6.6 million days' worth of federal employment spread across dozens of agencies. More than 2 million of those days were lost to furloughs at the departments of Defense and Treasury alone.

Because those workers were ultimately paid retroactively, the government didn't save any money by suspending their paychecks, which amounted to about $2.5 billion, according to a November 2013 report from the Office of Management and Budget. And the lost productivity cost taxpayers in other ways.

So what happens if they don't raise the debt ceiling in December?

That standoff promises to be even worse, and could inflict much greater economic damage.

Unlike virtually every developed country on earth, the U.S. budget process requires a separate vote every time the Treasury Department reaches the limit of the borrowing authority authorized by Congress.

That provides a relatively small group of fiscal bomb throwers in the House with an even better opportunity for mayhem—because the spending freeze would be much more severe. The economic and financial damage also would be much worse if the Treasury is forced to stop paying investors and default on U.S. debt.

But isn't that a way to control government spending?

No. The debt issued by the Treasury is used to pay for spending that Congress has already authorized for goods and services the government has already provided. It would be like trying to control your household spending by not paying a credit card charge for a meal you've already eaten.

Freezing the debt ceiling does nothing to better manage future spending or make government do more with less money.

If anything, forcing the Treasury to default on its debt would only increase government spending because it would raise future borrowing costs. Just as a deadbeat consumer who doesn't pay legitimate credit card charges has to pay higher interest rates, investors in U.S. Treasurys would demand higher returns to offset the risk of Congress pulling this stunt again.

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