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US Government Shut Down and Facing Default

US Capitol

On September 30 the United States said goodbye to the outgoing annual accounting period, October 1 is the new fiscal year day.  The main event on the New Year day is the absence of state budget appropriations. The situation is the result of sharp divisions on key budget provisions between the Congress and the President and bipartisan bickering on the Capitol Hill. A few months of acute debates have led nowhere. The budget is not approved as yet. According to the legislature effective since as far back as the XIX century, every article of the budget bill requires congressional approval to make it a law. The government cannot spend a dime without it. The functioning of state agencies is partially suspended since October 1. President Barack Obama has already made a video address to the military and Defense Department civilian employees. He lamented the shutdown saying, «unfortunately, Congress has not fulfilled its responsibility. It has failed to pass a budget and, as a result, much of our government must now shut down until Congress funds it again». He added that uniformed military will remain on normal duty status but to the Defense Department's civilian force, he said, «I know the days ahead could mean more uncertainty, including possible furloughs. You and your families deserve better than the dysfunction we're seeing in Congress».

All in all, there are 2, 1 million federal employees in the country. An estimated 800,000 (1 million according to some US sources) of the 2.1 million workforce who are deemed nonessential for the operations of the government will be sent home affected by unpaid furloughs after they have shut down their work. Besides federal agencies (including the Pentagon and United States embassies abroad), some structures at states level will be shut down too. No new claims for Social Security payments will be received, small business will get no loans from state anymore, national museums and parks will get closed, police and firemen will respond only to real emergency calls. In case the federal budget approval is delayed further, schools may close too. The estimated unemployment rate is around 13 million today, 1, 7 million (those who are eligible) get unemployment benefits but in case of further delay they may get state assistance no more. 

Social expenditure down, national debt up

The tough opposition on the part of Capitol Hill conservatives to the health care law initiated by President Obama in 2009 is the main stumbling block on the way to reconciling the differences over the budget. Taking advantage of the moment (the Democratic Congress) President Obama managed to push the bill through in 2010 preserving all the major provisions unamended. Then the process started to hit snags, Republicans have tried to block the legislature about 40 times. With unique persistence Obama vigorously protects the health care reform even at the expense of other social security programs. For instance, a few years ago the government took over the responsibility to rescue some bankrupt cities. The program has been gradually reduced during the last two years leaving many cities to their own fate, perhaps slow death. Estimated 250 once prosperous urban areas have become kind of ghost towns.

The Obama administration seeks new opportunities to cut social expenditure. The times of easily available unemployment payments are gone. Today there are additional barriers introduced to complicate the process. One of the ways to achieve «optimization» is to expand food stamps program, which is cheaper than giving the money to the poor. The food stamps program was launched forty years ago but it had been rather limited in scope till the crisis set in. Right in its full swing (2008) the number of recipients grew to 28 million. In October 2012 the program encompassed 47, 7 million Americans. The United States started to be called the country of SNAP capitalism (SNAP - the Supplemental Nutrition Assistance Program or food stamps). As previous estimates show, the drastic «dragon» cuts made possible to reduce the budget deficit below one trillion dollars or $845 billion (5,3 percent of GDP to be exact). No doubt, Washington will make it look like a great achievement. At that, the US national deficit is still high even in comparison with the European Union which is facing the fiscal and debt crisis. The US debt index has grown by around one trillion during the past fiscal year exacerbating another burning problem that America is facing today. 

Washington in for hot October

America is facing a default in the coming days. Treasury Secretary Jacob Lew has said the government will have exhausted its borrowing authority by Oct. 17, leaving the United States just $30 billion cash on hand to pay its bills. In a letter to top congressional leaders, Lew warned that a repeat of the debt brinksmanship of 2011 could inflict great harm on the economy and that «if the government should ultimately become unable to pay all of its bills, the results could be catastrophic».

The government reached its $16.7 trillion national debt limit. Since then the administration has been doing its best to convince lawmakers to raise the ceiling. The Republicans staunchly oppose the measure, they say it’s more preferable to cut state expenditure, first of all the health care program initiated by President Obama (according to Republicans Obamacare helped the President win the second term). In particular, they say common Americans disapprove the way the program is implemented. Some politicians, economists and businessmen reacted calmly to the warning by Treasury Secretary. They have seen before the plays staged by Washington named «expecting default». Every time a play ends the same way according to the usual scenario – the rise of «debt ceiling». There have been 78 national debt limit revisions since 1960. An outstanding event took place two years ago: the US national debt crossed the 100% of GDP threshold. It is around 103 % of gross domestic product at the moment. Normally the index is lower in the case of European Union member states with relative level of national debt below the 100% of GDP limit, but media and the International Monetary Fund keep on saying that it is Europe that goes through the most severe debt crisis, while the United States is allegedly «above risk». 

Still it becomes harder to cover up the real state of things in the United States with each passing year. All major world rating agencies have come under harsh and just criticism for distorting the real plight of world economy and finances (a factor spurring the financial crisis). Now they have to be more unbiased towards the United States. In 2011 the Republicans and Democrats clashed again over the ceiling, the both washed a lot dirty linen in public and made come to surface what proved the fact that the United States economy was in dire straits. No way rating agencies could turn a blind eye on it. For the first time in the United States history they lowered the country’s rating from the top «ААА» position down to «AA+». At the beginning of August 2011 America was walking a thin line on the verge of default (thought they preferred to call it a «technical» one). 12 hours before the deadline a reconciliation agreement was reached raising the ceiling by $2,5 trillion. It’s worth to note, the compromise was reached only in exchange for the promise given by president Obama to cut state expenditure by $2 trillion. 

The generous gesture made things last for only two years more. Obama urgently needs the ceiling raised again. Republicans will make him remember the unfulfillable promise given in 2011 to cut budget expenses. Experts are sure the US rating is doomed to go down in mid-October again. It’ll be a real blow for the government and private business, because ratings influence interest rates and the value of financial instruments (including bonds). The performance staged by Congress in October 2013 is to be no less captivating than the one the world saw in 2011. 

Tags: Republican Party US Obama