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19September2017

Budget impasse is part of democracy but breaching the debt ceiling should be avoided


On October 1 2013, the government of the United State of America (USA) was shut down due to the failure of the Congress to enact regular appropriations for the 2014 fiscal year. More than 700,000 non-essential employees were indefinitely furloughed without pay while another 1.3 million were required to report to work without immediate pay. Many services were also suspended.

As is the practice in most democratic economies (including Nigeria), the U.S. Constitution requires that all expenditures of federal funds be authorized by Congress with the approval of the President of the United States. The U.S. federal government and the federal budget process operate on a fiscal year cycle running from October 1 to midnight September 30. If Congress fails to pass all of the spending bills comprising the annual federal budget or "continuing resolutions" extending spending beyond the end of the fiscal year; or if the president fails to sign or vetoes any of the individual spending bills, certain non-essential functions of the government may be forced to cease due to a lack of congressionally-authorized funding.

 

Flimsy reason for shutdown

The US government shutdown occurred when the Republican-led House of Representatives included language delaying or defunding the Patient Protection and Affordable Care Act (commonly known as "Obamacare") in their approved budget while the Democratic-led Senate approved continuing funding at current sequester levels with no additional conditions. Political bickering on this and other issues between the House Republican on one side and President Barack Obama and the Senate Democrats on the other led to the budget impasse which threatens massive disruption.

Fighting over an adjustment to an Act that has been passed by the Congress, upheld by the Supreme Court and supported by majority of Americans through a national election appears very flimsy. Countries experience budget impasse from time to time and Nigeria is quite familiar with disagreements between the Presidency and the National Assembly, usually over revenue benchmark and appropriations. However, the reason for the current impasse makes the US look ordinary and not a global benchmark for governance that the country is considered to be.

 

Breaching the debt ceiling is undesirable

As disruptive as the shutdown is for America, breaching the debt ceiling would be catastrophic for the whole world. The US Dollars is the world’s reserve currency; hence its debt is considered as safe instrument and a significant portion of the world’s financial transactions is collaterised by the US government debt instruments. Most sovereign debts are refinanced through the issue of new debt to redeem a mature one. Unfortunately, by October 17, 2013, the US government would have reached its legal borrowing limit and unless the Congress raises that limit, the US government would be unable to refinance its maturing debt and may thus default on the repayment of its debt. This would affect America’s credit worthiness and lower the quality of US government debt as collateral for financial transactions and increase bond yields.

The implication would be dire for countries (especially developing countries) and businesses globally whose borrowing rates are benchmarked on the US government treasuries and debt. Borrowing would become expensive for businesses and economies alike, putting further strain on the global recovery and probably pushing some economies into the deeper end of financial crisis.

 

Step back and fight another day

As advised by “The Economist”, ‘the House Republicans need to get their priorities straight’. Unnecessary political gridlock does not fit American politics and the Republicans should know this, if they want to win the presidency in 2016. They should pass the budget without any unnecessary fight and raise the debt ceiling for the long term (if they can’t remove it completely). And a temporary and short term increase in the borrowing limit will only prolong the uncertainty with implications for global economic growth.

Obamacare is a different approach to the failing health care management system in the US and it is good option to try out. However if Obamacare eventually turn out to be a failure, it would become glaring to the American people and the Republicans could easily repeal it if they win the presidency and the Senate in 2016. For now, the GOP appears to be fighting a lost battle.

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