In what is quickly becoming a semi-annual display in governmental incompetence (this is the fourth since 2011), we are bracing once again for a government shutdown, debt ceiling debate, and budget crunch. The government will shut down due to its failure to create a budget on October 1, 2013, if it has not created one in the meantime. Additionally, the government is once again facing a default on its loans and obligations if it cannot borrow more money by October 15, 2013, because it will hit the debt ceiling. Of course, the big shakedown in this “battle of the titans” is over funding Obamacare.
When writing the Constitution, the U.S. founding fathers introduced the notion of “checks and balances.” In this context, Congress writes the “checks,” by authorizing a budget, and the President determines whether the budget strikes the right “balance,” by either signing or vetoing the budget. Of course, the checkbook itself does not actually balance, which is why the government is consistently hitting its debt ceiling. This year, Republicans in the House propose to “defund” Obamacare, which essentially means that the law can remain in place, but federal money will not be authorized to pay for it. Effectively, this would render Obamacare a defunct piece of legislation. Obviously, the Democrat-controlled Senate is not poised to permit such a budget to even land on President Obama’s desk and the President will most certainly not sign such a bill.
In prior years, each of these fights has come with predictions of worldwide financial chaos, which have not come to fruition. However, it is important to remember that the government did not actually shut down and did not actually default on its debt obligations. However, the government did reduce spending resulting in furlough days for government employees, tax increases for working individuals by way of reductions in tax benefits (e.g. the temporary payroll tax deduction and Making Work Pay Credit) and actual rate increases, and a downgrading of our national credit rating. The effects of yet another showdown could result in additional problems. The estate tax was dramatically lowered in the negotiations, however, going from a $1 million applicable exclusion amount to an inflation-adjusted $5 million.
Notably, a government shutdown threatens to unwind much of the progress that has finally been made toward alleviating the backlog in VA claims processing. Additionally, it is possible that a delay in Social Security payments will occur due to fewer working employees. Although, ironically, the implementation of healthcare exchanges under Obamacare is not anticipated to be affected, the exchanges will open on the same day the government will close: October 1. Furthermore, the last downgrade to the U.S. credit rating did not have a substantial effect; it is still widely considered to be the safest investment in the world and our downgrade was met with downgrades of several other countries’ debts. This debt ceiling debate, however, could lead to yet another knock on our credit score. Particularly in the case of default, the ripple effects may be felt in retirement and investment accounts around the world.
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