Government Shutdown Explained: Causes, Consequences, and History

For the last two and a half years, the government has been playing a game of chicken with the budget. And a lot of people are left nervously watching on the sidelines. The problem boils down to passing a spending bill to keep the government running. If the spending bill isn’t passed by the time the old bill runs out, the government effectively shuts down. This sounds impossible, but it has happened before—the last time at the end of 1995 and early 1996, when the government closed its doors twice.The current budget only extends through September 30, 2013. If a budget is not passed by October 1, 2013, then the government is in danger of shutting down.

So why hasn’t the government passed a spending bill? This has been going on for the last two and a half years (since early 2011, more or less). The problem is that the government is close to reaching its debt ceiling, which means they can’t legally borrow more money. The government needs to borrow the money to continue current operations, so they need to extend the debt ceiling. Which brings politics into play. Politicians on both sides are hesitant to pass a spending bill with major items they don’t agree with, especially if it means borrowing more money or extending the debt ceiling. So each side is taking a firm stance and dragging their feet on passing he spending bill, bringing us closer and closer to a government shutdown. Let’s take a look at who could be affected.

Debt Ceiling Crisis – What Happens if the Government Shuts Down?

Government services affected by a possible shutdown

Essential vs. Non-Essential Government personnel. As we all know, the government can’t completely shut down – too much of our day to day lives rely on government support. For example, the airlines require Air Traffic Controllers and TSA to keep the airlines going. We also need to think about our national defense and other safety issues. Keeping this in mind, the government is planning on breaking people into two distinct groups – essential and non-essential personnel. The difference is that essential personnel will continue working during a government shut down, even though they will not receive their paycheck until the government resumes operations. Non-essential personnel will receive a non-paid furlough until the spending bill is passed. Unfortunately, no one has officially designated who is included in each group of workers, and some estimates place the non-essential personnel at close to 800,000 people. There is a possibility that government workers placed on a non-paid furlough could receive back pay after the fact, but Congress would have to make a special approval for this to happen.

Military pay and benefits. Military members won’t get paid. This is a departure from the last major government shutdown, which occurred in 1995, during which military members continued to work and get paid. Military members get paid on the 1st and the 15th of each month, and would still receive their paycheck on the 15th, but if the government shuts down on the 8th, as is a possibility, then military members would only receive their paycheck for money earned through the 8th of the month. Servicemembers would still be required to work because their services are required for national defense, and they would receive back pay for any pay and benefits they did not receive during the government shutdown.

Federal taxes. This is an interesting situation, but basically it boils down to this: The IRS would stop processing paper returns and stop sending refunds by paper check. The IRS would continue to process returns filed electronically, and would likely continue sending electronic refunds. Other IRS activities potentially on the chopping block: audits, IRS help desk and tax payer hotline. Here is more about possible impacts of a government shutdown on taxes.

What about Social Security? The last time the  US government shut down, they continued paying Social Security benefits. However, this time around, President Obama has gone on the record stating he isn’t sure if the government would be able to continue sending out social security benefits if the government shuts down. This is a change from previous messages sent out by the government since Social Security benefits are paid out of the Social Security Trust Fund, which does not need annual budgetary approvals.

Additional government services and how they may be affected:

• US Postal Service would remain open because they are a self-funded government operation.
• The Federal Court System has contingency funds which will last up to 2 weeks, after which operations may be affected.
• Essential financial services and banking offices will remain open.
• Law enforcement will continue operations
• National Institutes of Health will stop clinical trials.
• National parks, museums, and monuments would close.
• Mortgages will not be processed by the FHA.
• Passports will not be processed.
• Small Business Administration will not process loans for small companies.

Bottom line: The government can’t legally function without a properly approved budget. At issue is whether or not Congress can agree upon a budget by September 30th. If they do, then life goes on pretty much the same for everyone. If they don’t agree on a spending plan, then the government is at risk for shutting down until they can pass a spending bill.

Let’s all hope this is just political posturing and a last minute budget deal is reached before government employees are furloughed and some people are left without paychecks.

Related post: 

How We Manage Our Money on a Daily Basis