Battles Over Federal Shutdown and Debt Limit Loom This Winter

This holiday season could bring turmoil—or at least tension—to the economy as two crucial federal budget deadlines are set to expire.

First, lawmakers must pass a budget by Dec. 20, or government services will shut down. Days later, on Jan. 2, the government will bump against its self-imposed borrowing limit, setting the clock ticking for lawmakers to reach a deal extending the debt ceiling, otherwise, the U.S. government could default on its debts. Both could have major consequences for the economy.

The winter deadlines were set Sunday, when Democratic and Republican congressional leaders announced a deal to fund the government through Dec. 20. If the deal, which is supported by the leadership of both parties, passes the House and Senate before Sept. 30 as expected, a government shutdown will be averted for the time being. The debt limit deadline was set in June 2023, when President Joe Biden signed a bipartisan deal allowing the government to continue borrowing just days before it would have run out of money.

Partisan brinkmanship over the debt ceiling and government shutdowns have become nearly annual rituals in Washington, to the detriment of the country’s credit rating. They have raised questions about the country’s willingness to pay back Treasury bonds, which play an important role in the financial system because they’re viewed as virtually risk-free investments.

Federal Budget Fights Could Be Shaped By Elections

The showdown this winter will take place on a reshuffled political chessboard after the November elections and could extend into the spring after newly elected officials take office. Lawmakers could pass temporary continuing resolutions funding the government well into the new year, as they have done in past showdowns over the budget. 

The debt limit bargaining could also drag on into the spring since the Treasury Department typically uses accounting tricks that allow the government to keep borrowing for several months after the debt ceiling has been reached. 

The outcome of those negotiations will depend on which party takes control of which branch of government in November. Polls are close between Democratic presidential candidate Vice President Kamala Harris and former President Donald Trump, with control of the Senate and House also up for grabs.

Economists have predicted that should negotiations in a divided government fail, a government default would plunge the country into a recession and cause borrowing costs to skyrocket. However, the deadline could also be used as leverage in negotiating over the fate of Trump’s sweeping tax cuts passed in 2017, most of which expire in 2025. 

“The shape of a deal is already possible to see: Republican senators will agree to suspend the debt ceiling in return for the House extending the Trump-era personal tax cuts,” Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a research note.

“The length of the suspension, and the extent of the roll-forwards of the tax cuts, will depend on the exact balance of power. But for now, we see little reason for investors in Treasuries to price-in any default risk before the November elections,” added Tombs.