If this week’s negotiations to raise the federal debt ceiling do not end well, there could be major consequences to the economy. Administration officials say that by Thursday they will have exhausted all borrowing authority and only have cash on hand. There would be enough money to make payments for a few days, but not more than two weeks.
According to an article in the Washington Post, economists on both sides agree that no matter which course the President chooses, a drop in federal spending that large would have an impact on economic growth. The administration would have to consider delaying or suspending tens of billions of dollars, as soon as Friday, to Medicare and Medicaid providers, food stamp recipients, unemployment benefits and Social security checks. This could be detrimental to seniors and low-income people. Veterans’ benefits and pay for active-duty troops could also be delayed. Nearly $60 billion is due in November to cover the aforementioned expenses.
Further, economists have estimated that if the government shutdown lasts through October, real GDP could be reduced as much as 1.5 percentage points in the fourth quarter. Hundreds of thousands of furloughed workers are expected to postpone purchases, which would be a major hit to growth through reduced consumer spending. Consumer sentiment hit a nine-month low in early October. Estimates for fourth-quarter GDP are being held steady or have been cut slightly in light of the shutdown. Citigroup’s chief U.S. economist Robert DiClemente stated that the longer the delay in authorized spending, the greater the incidence of negative spillovers to private activity. Though these impacts would be reversed once the furloughed workers return to work, there would still be drags on the economy that may continue into 2014.