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| 3 minutes read

The "fiscal cliff" returns: Democrats plan to avoid shutdown, debt default

On September 10, House Majority Leader Steny Hoyer (D-MD) shared with House Democrats leaders' plan to keep the federal government funded past the end of the current fiscal year on September 30, 2021. The House will return the week of September 20 to pass a short-term continuing resolution (CR) to hold current funding levels in place through December. Senate Democrats will meet on September 14, where they will likely plan to consider the House-passed CR in short order. However, the plan could derail if Democrats fail to secure enough support for a funding extension. 

Each year, Congress must pass twelve separate appropriations laws to fund normal operations in federal government by the start of the new fiscal year on October 1. If they fail to pass those laws, a partial or full government shutdown can happen. Under a shutdown, only emergency services continue while day-to-day activities like federal law enforcement investigations, security inspections at airports, tax claim processing, national park operations, and other daily federal operations all stop. While a CR is less disruptive than a full shutdown, a CR simply extends current federal funding levels for a few months, meaning agencies must wait longer to get anticipated funding changes as well as delay new starts on projects and contracts. 

For more than a decade, Congress has consistently failed to meet this October 1 funding deadline, sustaining federal operations with CRs. This year is no different: Congress has not yet passed any of the 12 annual federal funding bills into law. With Congress distracted this year with coronavirus relief and now a massive infrastructure package, Leader Hoyer announced that Congress' Democratic leadership will again avoid a shutdown by passing a CR that will move the October 1 shutdown deadline until around mid-December (potentially, December 10). 

The White House anticipated a CR and this week sent Congress a list of "anomalies," requesting that Congress add extra spending to what is meant to be a simple extension of current funding levels. Priorities on this list include a requested $6.4 billion to resettle around 65,000 Afghans expected to arrive in the U.S. in September plus another 30,000 arriving after October 1. Another priority for the CR: $14 billion for disaster relief, plus around $10 billion for response to Hurricane Ida. 

Another point to watch: Democrats will likely attach a debt ceiling suspension to the must-pass CR. The "debt ceiling" is the maximum amount of debt the federal government can accrue. While many may think of the "federal debt" as a remote financial concept, it also sustains the federal government's ability to pay daily obligations like Social Security payments, veterans' benefits, federal employees' and active-duty servicemembers' pay, payments on federal contracts, and more. Congress last suspended the debt ceiling in 2019, but the limit came back into effect in August at about $28.4 trillion after Congress failed to pass another suspension. Secretary of the Treasury Janet Yellen has warned repeatedly that Congress should pass another suspension as soon as possible to avoid the U.S. default, which would cause "irreparable damage to the U.S. economy and global financial markets."  

Because the economic consequences of the "fiscal cliff" in a shutdown AND debt default are so dire, Congress and the stock market have been relatively sanguine in assuming that congressional leaders will deal with it in time, as they always have. However, Congress must negotiate a growing partisan divide to avoid the cliff. In the Senate, for example, Democrats must convince at least ten Republicans to vote with them on a package to pass the CR and raise the debt ceiling, but Minority Leader Mitch McConnell (R-KY) and 46 of the 50 Republicans in the Senate have already signed a letter opposing a debt limit increase. Republicans (and some moderate Democrats) will demand federal spending cuts in exchange for raising the debt ceiling, which will clash with Democratic leaders' plans to inject trillions into the national economy through President Biden's Build Back Better plan. 

Time will tell how the current "fiscal cliff" may resolve. But observers should not underestimate the potential consequences: In 2011, a similar standoff over the debt ceiling triggered the biggest stock market crisis since the 2008 crash and led Congress to eventually pass the Budget Control Act, which ordered escalating spending cuts (or "sequestration") that many economists blamed for slowing the economy. 

To stay informed on the "fiscal cliff," please stay tuned to Michael Best Strategies alerts, and reach out to your Michael Best Strategies team. 


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