Understanding the Federal Budget Crisis and Government Shutdown

In addition to the day-to-day consequences of an extended government shutdown, any deal brokered to break the current budget impasse could have significant near-term and long-term implications for institutions of higher education.

For example, funding levels for the Department of Education, including Federal Student Aid programs, will be set once Congress comes to an agreement on the FY14 budget. Should negotiations lead to a large-scale budget package, that deal could include an economic framework for comprehensive tax reform. This would set the stage for a comprehensive tax reform debate and possibly define how much revenue is available for entitlement programs and federal discretionary spending for years to come.

For background, NACUBO presents six questions and answers to help explain how Washington reached the current impasse.

1. Why is the federal government shut down?

Republican and Democratic lawmakers did not agree on a one-year budget for fiscal year 2014. The fiscal year began October 1 and runs through September 30, 2014. Without a budget, or temporary budget, the federal government is legally forced to enter into a shutdown. Certain laws and regulations govern a shutdown, allowing certain "essential" services to continue—such as the distribution of Social Security benefits and the operation of VA hospitals.

2. What is a continuing resolution?

A continuing resolution (CR) is a stop-gap measure that typically allows the federal government to operate under the spending levels of the previous fiscal year—in this case, FY13. Congress often fails to complete all of its budget work by October 1 and frequently uses temporary CRs to avoid a shutdown and keep the government running until a longer-term agreement is struck.

3. What is a "clean CR"?

Some lawmakers have been calling for a vote on "clean CR"—legislation that only provides funding to keep federal agencies operating. A "clean" CR would not contain controversial policy riders, such as language to amend or delay the Affordable Care Act or set new long-term economic policies.

4. Why was an FY14 budget agreement so difficult to come by?

As NACUBO reported in June, sequestration and current political dynamics set up the perfect storm for budget gridlock. The White House and Senate Democrats proposed the overall FY14 discretionary budget target at $1.058 trillion, which is the funding level set by the 2011 Budget Control Act, without the added cuts of the sequester. The Republican-led House set FY14 discretionary funding to $967 billion, which is a $19 billion, or 17 percent, cut from the already deep sequester cuts taken in FY13—resulting in a $91 billion difference between the Senate and the House.

Neither budget proposal is fully consistent with the parameters of sequestration. The Senate bill assumes replacing with new revenue the proposed sequestration cuts, and the House bill does not comply with the sequestration order to divide discretionary spending cuts equally between defense and non-defense spending.

Without a topline compromise, agreement on any of the 12 individual appropriations bills that make up the federal budget was impossible.

5. So why didn't Congress pass a CR this year until they could work things out?

For several years now, some politicians and others have been calling for a "grand bargain," a sweeping deal that would include myriad spending cuts and additional revenue (through tax increases or fundamental tax reform). Political divisions, however, have simply been too deep to reach major agreement on long-term or short-term economic policies. GOP objections to the Affordable Care Act took the forefront of public attention as the point of contention between Democrats and Republicans. Yet other serious economic demands are also at play.

Within GOP ranks, there have been discussions of reshaping the spending cuts required by sequestration (such as reducing the level of military spending cuts), reforming the inflation adjustment for Social Security (a policy referred to as chained Consumer Price Index), further means-testing for Medicare benefits, and limiting the amount of revenue that can raised through taxes to a certain percentage of the GDP—which could necessitate future spending cuts to entitlement and discretionary spending programs. Democratic lawmakers insist that any comprehensive budget deal must include new tax revenues as well modify sequestration spending limitations.

Rather than compromise, leaders of both parties believe they can succeed in protecting their priorities by winning over public sentiment during the shutdown.

6. How does the federal debt ceiling play into this debate?

With no end to the current shutdown in sight, it is increasingly likely that a budget deal will become entwined with a deal to lift the federal debt ceiling.

Without congressional action to lift the debt ceiling, the federal government faces the prospect of defaulting on its debt on October 17. Some economists predict the repercussions of default could send the economy tumbling, cause the value of the dollar to plummet, and drive a sudden increase in interest rates. To date, GOP leaders continue to seek concessions from Democrats before they will agree to lift the federal debt ceiling.

For more on the debt limit:
Washington Post, Tuesday, April 19, 2011
What's the debt ceiling and why is everyone talking about it?