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Debt battle could lead to government shutdown

Fresh from US election victory, Republicans face a rapid test of their debt-slashing resolve, one that could spark a government shutdown and, some fear, undermine efforts to aid the recovery.

world Updated: Nov 07, 2010 11:38 IST

Fresh from US election victory, Republicans face a rapid test of their debt-slashing resolve, one that could spark a government shutdown and, some fear, undermine efforts to aid the recovery.

Contrary to popular belief, the US government cannot spend at will. Like anyone with a bank account, Washington has a limited overdraft.

Instead of asking the bank for an extension, presidents have to get permission from Congress, and frequently do. But that might now be tricky for President Barack Obama.

Around a year after the last raise, Obama's administration is expected to run up against the current debt ceiling some time early next year.

Obama will then have to go cap in hand to a Congress that now includes many ultra-conservative Republicans and Tea Party candidates who think the current level of 14.3 trillion dollars is quite enough, thank you very much.

One of the right's standard bearers, former House speaker Newt Gingrich, has called on Republicans to refuse to raise the debt ceiling, a move that would cause a government shutdown.

With a majority in the House of Representatives and a big enough minority to thwart action in the Senate, that threat is being taken very seriously.

"The government cannot function unless the debt ceiling is lifted," former labor secretary Robert Reich said.

"Ordinarily, it's automatic," he added, "But the new Tea Party branch of the Republican party will insist on making a big issue out of raising the debt ceiling."

Throughout the election campaign, Tea Party candidates like Kentucky senator-elect Rand Paul pushed a policy of starving the government "beast" by cutting spending at the same time as lowering taxes.

Paul's election pledges to "fight to balance the budget and dramatically reduce spending" would be difficult to square with voting to enlarge the deficit.

Opinion polls show the US public is angry at what it views as overspending by Washington at a time when many American families have been forced to tighten their belts.

And Republicans have voted to shutter the government before.

In 1995, Gingrich led the party to a vote against lifting the debt ceiling, causing all non-essential services to be cut to prevent a catastrophic US default that would have sent the global economy into free-fall.

According to Reich, who served under Democratic president Bill Clinton, the more hardline Republican new kids on the block will face opposition from the the party establishment, which is loath to reinforce Democrats' efforts to paint them as obstructionist.

"More traditional Republicans, including (House speaker-in-waiting) John Boehner, won't want to because they don't want to get into a game of chicken with the White House of a sort Newt Gingrich precipitated," according to Reich.

"The public is in no mood for a government shutdown. They want their elected representatives to be able to work together effectively. So the interesting political question is who will win the showdown on this issue within the Republican Party."

There are already signs that the hard right may not be willing to once again engage the nuclear trigger of fiscal policy.

"No one regardless of who is in the majority wants to see the US default on its debt," said Mattie Corrao of the conservative group Americans for Tax Reform, which usually advises representatives to vote against raising the ceiling.

"What we will hopefully see in the future is people working to damp down on all of this reckless spending and work toward a point where we are not considering a debt ceiling, but the outlays in and of themselves."

Whatever the outcome of the political tussle within the Republican party, financial experts are warning that another government shutdown would be an unmitigated economic disaster.

"It would be a huge negative hit for the economy," according to David Min, a former Congressional staffer who now works for the left-leaning Center for American Progress.

According to Min, shutting down the government would even neutralize the Federal Reserve's recent 600 billion dollar punt to prime the economy, a policy dubbed quantitative easing two, or QE2.

"If the Republicans shut down the government, any impact of QE2... will be dwarfed by the huge negative fiscal impact of shutting down the government."

"If you cut down the government, even for a week or two, you furlough workers, you shut down services, that is going to be a huge fiscal hit, the fact that money is a little bit easier to acquire through credit is not going to offset that," he said.