How budget showdowns could squeeze the US economy

Monday - 9/30/2013, 5:28pm EDT

FILE - This Sept. 27, 2013 file photo, President Barack Obama gestures while making a statement regarding the budget fight in Congress and foreign policy challenges in the James Brady Press Briefing Room of the White House in Washington. Unless Congress acts before Tuesday to fund federal spending, some of the government would shut down. Separately, the government will run out of money to pay its bills by late October unless Congress raises the federal borrowing cap. (AP Photo/ Evan Vucci)

CHRISTOPHER S. RUGABER
AP Economic Writer

WASHINGTON (AP) -- Just as the U.S. economy is struggling to expand at a healthy pace, a pair of political standoffs threatens to slow growth and spook investors.

Unless Congress acts before Tuesday to fund federal spending, some of the government would shut down. Separately, the government will run out of money to pay its bills by late October unless Congress raises the federal borrowing cap. A 2011 fight over the borrowing cap rattled consumers, businesses and investors and likely slowed growth.

Here are questions and answers about how the two standoffs, now intertwined, could affect the economy and financial markets:

Q. What exactly will happen within the next days and weeks?

A. The most urgent deadline is for Congress and the White House to agree to keep funding the government after the current budget year ends Monday. Otherwise, some of the government would have to shut down. The House and Senate are considering bills to fund the government past the deadline. But House Republicans want to cut off funding for President Barack Obama's health care law as a condition of passing the spending measure. Senate Democrats and the White House have balked. Unless one side essentially blinks, a partial shutdown of the government will occur.

Q. What would be the effect on the economy if the two sides miss the deadline for passing the spending measure?

A. About one-third of the government will shut down. About 800,000 of about 2.1 million federal employees will be sent home without pay. National parks will close.

NASA will continue to keep workers at Mission Control in Houston and elsewhere to support the International Space station, where two Americans and four other people live. Aside from that only about 3 percent of NASA's 18,000 workers will keep working.

The military and other agencies involving safety and security would continue to function. These include air traffic controllers, border patrol and law enforcement officers. Social Security, Medicare and veterans' benefits payments would continue, but there could be delays in processing new disability applications.

A partial shutdown that lasts no more than a few days wouldn't likely nick the economy much. But if the shutdown were to persist for two weeks or more, the economy would likely begin to slow, economists say.

Extended closures of national parks would hurt hotels, restaurants and other tourism-related businesses. Delays in processing visas for overseas visitors could interrupt trade. And the one-third of the federal workforce that lost pay would cut back on spending, thereby slowing growth.

A three-week shutdown would slow the economy's annual growth rate in the October-December quarter by up to 0.9 percentage point, Goldman Sachs estimates. If so, the growth rate next quarter would be a scant 1.6 percent, compared with the 2.5 percent that many economists now forecast.

The contingency plans for various government agencies are available at http://www.whitehouse.gov/omb/contingency-plans .

Q. What about the federal borrowing cap? First of all, what is it?

A. It's a legal limit on how much debt the government can pile up. The government accumulates debt two ways: It borrows money from investors by issuing Treasurys. And it borrows from itself, mostly from Social Security revenue.

Q. What if Congress can't agree to raise the cap in time?

A. It could be disastrous. No longer authorized to borrow, the government would have to pay its bills only out of the revenue it gets from taxes and fees. This would force the government to immediately slash spending by 32 percent, the Bipartisan Policy Center estimates. Most analysts think the government would delay paying each day's bills until it had accumulated enough money to pay them all.

Even worse, the government could miss interest payments on Treasurys, triggering a first-ever default by the U.S. government. U.S. Treasurys are held by banks, governments and individuals worldwide. Ultimately, a prolonged default could lead to a global financial crisis.

At the same time, Social Security and other benefit payments would be delayed. Government contractors might not be paid and would likely lay off workers. Paychecks for military personnel could be delayed.

The government actually reached its borrowing limit back in May. Since then, the Treasury has taken a variety of measures to avoid exceeding it. But the cash generated by those measures will run out sometime between Oct. 22 and Oct. 31, the nonpartisan Congressional Budget Office estimates.

The date isn't exact because it isn't possible to foresee precisely how much revenue the government will receive and when.

Q. Will the economy escape harm if both deadlines are met?