Sat 30 Sep 2023 1:22 pm - Jerusalem Time
What is a federal shutdown in the United States?
The United States is approaching the closure of federal institutions at the end of the week, with the chances of avoiding it diminishing as lawmakers reach an impasse in terms of agreeing on a short-term spending bill.
The US fiscal year begins on October 1, but sharp disagreements among Republicans over the size of the federal debt have prevented the passage of bills needed to keep the government funded and open.
Credit rating agency Moody's warned this week that the closure would be "negative" for US sovereign debt, threatening its top-tier rating and raising the possibility of higher borrowing costs.
Here's what will happen if a federal shutdown occurs in the United States.
Hundreds of thousands of federal employees will be on unpaid leave, while military personnel and other employees deemed “essential” will continue to work but without pay.
The American Federation of Government Employees estimates that the complete shutdown will deprive about 1.8 million federal employees of their salaries throughout its duration.
Nearly 850,000 non-essential employees will be placed on leave without pay, according to the Committee for a Responsible Public Budget, an independent organization.
When a financing agreement is reached, these restrictions will be lifted and salaries will be paid to all employees retroactively, according to the union.
Only services classified as essential will continue to operate.
During previous closures, welfare checks continued to be paid, and air traffic controllers, border guards and hospital staff remained on the job.
But many services are likely to be affected, including new applications for Social Security and Medicare, food and environmental site inspections, as well as national parks.
The impact will be greater the longer the closure period.
Economists at Goldman Sachs estimate that the shutdown will hurt economic growth in the fourth quarter by 0.2 percentage points for each week it lasts.
It may take two or three weeks to lift the closure, according to a note by Goldman Sachs economists in which they ruled out “that either party will make immediate concessions.”
According to the memo, “While the funding cuts were quickly lifted, the political environment leading up to the (current) deadline is more reminiscent of the situation that preceded previous long-term closures.”
Assuming the end of the closure before the end of this year, Goldman Sachs estimated that the growth rate at the beginning of next year would be similar to the decline in the fourth quarter, while researchers at Oxford Economics expected it to compensate for half the loss.
Oxford Economics estimated that the loss of government employee production would irreparably cost annual economic growth about 0.1 percentage point per week.
The shutdown may also indirectly affect the economy as federal workers who are not receiving salaries will cut back on their spending.
The potential shutdown is beginning to impact Wall Street, with major stock indexes falling as the deadline approaches.
Economists fear that the closure will also stop the publication of federal government data.
This constitutes a source of concern for the Federal Reserve, which said that it will be guided by this data to approve possible adjustments to interest rates. The Federal Reserve has recently slowed the pace of raising interest rates as it addresses inflation.
In the absence of new data, the Central Bank will be forced to make decisions with repercussions affecting the American economy, without having a clear picture of the situation.
While the impact of a short-term closure will be limited in the long term, it could become a major problem if representatives fail to reach an agreement quickly.