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A debt limit breach and a government shutdown: Different crises but a terrible way to do business

This month, the federal government’s borrowing power is nearing its limit, requiring policy leaders to debate how to avoid the dire situation of not having enough money to service the national debt.

Conversations about this looming crisis—known as a debt limit breach—may bring to mind another dire and perhaps more well-known situation: a partial or full government shutdown.

These crises are different in origin and nature, but similar in effect. Both lead to real-world challenges for people across the U.S., disrupt critical federal services, undermine public trust in government, and make it harder for our government to respond to threats and keep us safe.

Still, a debt limit breach would be more harmful for our nation and for the public good.

Debt limit breach

By statute, Congress limits the amount of money the Treasury may borrow to fund government operations even as it mandates that agencies spend more money than the government takes in.

However, the Treasury has never defaulted on U.S. obligations because Congress has always raised the debt limit before it has been reached.

That would change if Congress fails to raise the debt limit. A debt limit breach would result, leading to our government’s inability to fully pay its obligations, to make payments to creditors such as bond holders or to issue new debt.

In this scenario, the Treasury Department would be put in the near impossible situation of deciding which bills to pay. If the department chooses to service the nation’s debt first, critical federal benefits could be at risk: $50 billion in Social Security benefits that are set to go out in early June, and more than $20 billion to Medicaid payments, $6 billion in federal salaries, $12 billion in veterans’ benefits and $1 billion for the Supplemental Nutrition Assistance Program, more commonly known as “food stamps.”

In short, reaching the debt limit is a no-win situation for our government and the public.

Government shutdowns

While the debt limit is about paying the bill for spending that Congress already approved, government shutdowns result from standoffs in Congress over future spending.

Every year, Congress is required to approve appropriations that fully fund the federal government’s budget. When Congress does not pass full-year funding by the start of a new fiscal year on Oct. 1— or at least pass short-term funding to tide agencies over while full-year funding is negotiated—a shutdown occurs.

Since implementation of the Congressional Budget Act in 1977, this has happened 20 times. The most notable recent shutdown occurred over a 35-day period from December 2018 through January 2019, triggering a lapse in funding that interrupted highly visible services from agencies such as the National Park Service and pausing federal operations critical to public safety, such as inspections related to hazardous waste, drinking water and chemical facilities.

Private industry also suffered unnecessary setbacks, including reduced access to small business loans, and many federal employees performing jobs deemed “essential” (e.g., transportation security personnel and some food inspectors) were forced to work without pay for over a month.   

Like a debt limit breach, shutdowns are damaging to the taxpayer and to the economy, requiring agency leaders to spend scarce time on contingency plans and deal with fallouts from spending gaps rather than address our nation’s biggest long-term challenges.

Which is worse?

Still, breaching the debt limit is more concerning than a government shutdown.

While our government has a general playbook for how to respond to shutdowns, no such guidance exists for a debt limit breach. We’d be in unchartered territory as a country, with a real potential for rolling blackouts of federal services as Treasury determines which payments to make. During a shutdown, a clearer sense of the availability of federal funds makes it easier to predict how long—and which—federal programs and services will continue to function.

A debt limit breach would also trigger more economic turmoil. Buyers of government bonds would demand higher interest rates to offset the risk of government defaulting on its debt again. In turn, the U.S. credit rating would be downgraded, resulting in an economic jolt that would cause layoffs, harm stock prices, and make it all the more difficult for our government to address urgent matters such as economic recovery from the pandemic, cybersecurity and other threats to national security.

A way forward

All well-run businesses require the ability to budget for the work they need to do and would not be able to function with the level of uncertainty currently facing federal agencies.

We are hopeful that Congress and the White House will come to a resolution before our debt limit is reached—and that an agreement on spending will foreclose the possibility of another government shutdown at the end of the fiscal year to ensure that agencies have the necessary funding to deliver on their missions.

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