U.S. government shutdown looking more likely. What would the impacts be?

Time is running out for U.S. lawmakers to pass legislation that can avoid a government shutdown at the end of the month — an event that could have broad implications for federal workers and the North American economy.

Congress has until midnight Sunday to reach a deal on funding the government, but far-right Republicans in the House of Representatives have dug in their heels on enacting steep spending cuts, forcing House Speaker Kevin McCarthy to try and reach a consensus within his own party.

The Democrat-controlled Senate is unlikely to support those cuts and other conservative priorities, including ending military aid to Ukraine as well as climate change funding. U.S. President Joe Biden has also vowed to veto those measures.

McCarthy is set to try and push some spending bills through the House this week in the hopes of avoiding the shutdown deadline. The Senate, meanwhile, was pursuing its own legislation that would continue current funding for just six weeks, allowing more time for budget negotiations.

If even a short-term spending resolution isn’t passed in time, the government will shut down on Oct. 1.

While some essential services will be exempt, many other government functions will be severely curtailed, and millions of federal employees won’t receive paycheques. Social services and benefits for low-income Americans will also be hit.

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Economists warn a shutdown — depending on how long it lasts — may affect consumer and investor confidence in the U.S. economy, which is already feeling the pressure from inflation and multiple labour disputes. That could spill over into Canada, those experts say.

“There will be micro-disruptions for Canada,” said Thomas Davidoff, an economics professor in the University of British Columbia’s Sauder School of Business.

“The longer (a shutdown) lasts, the worse it could get” for both countries, he added.

The White House has spent recent days highlighting the impacts a shutdown will have on everyday Americans who rely on government services.

On Monday, U.S. Agriculture Secretary Tom Vilsack told reporters that the “vast majority” of the seven million participants in the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) program would see an immediate reduction in benefits in the days and weeks after a shutdown starts.

The U.S. Department of Agriculture says nearly half of U.S. newborns rely on WIC, which provides benefits to ensure new parents and infants get proper nutrition.

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A separate benefits program, Supplemental Nutrition Assistance Program (SNAP) — which helps over 40 million Americans with the cost of groceries — will continue as normal for the month of October but could be affected afterward, Vilsack said.

Other assistance funds could also be depleted. The U.S. Federal Emergency Management Agency’s (FEMA) disaster relief fund, already stretched thin this year by increased wildfires and hurricanes, could run out of money and “complicate new emergency response efforts,” the White House said.

Education grants like Head Start, small business loans, food and environmental inspections, and infrastructure projects could all be impacted by a lack of funds, according to the Biden administration.

Some government assistance, including Social Security, will be exempt from a shutdown and cheques will continue to go out. But Biden administration officials warn even those funds could risk being depleted the longer a shutdown lasts.

Although employees deemed essential such as air traffic controllers and law enforcement officers will still have to report to work in the event of a shutdown, other federal employees would be furloughed. Under a 2019 law, those same workers are slated to receive backpay once the shutdown ends.

Military operations deemed essential for national security will continue. That includes the overseas training of Ukrainian fighters defending the country from Russia’s invasion, the Pentagon confirmed last week, as well as already committed weapons shipments.

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But Pentagon spokesperson Sabrina Singh admitted to reporters on Monday that a shutdown would still have implications on military readiness, with training and paycheques delayed.

“When you don’t have your full operating capacity, to be able to help with a mission, to be able to conduct an exercise or training, of course, that gets to our national security and readiness,” she said.

“Troops would go without pay. Military families would be impacted, of course. For folks that are not getting paycheques, that impacts how and when can buy groceries, child care, all of these things.”

During the debt ceiling crisis last summer, credit agencies and economists warned a failure for lawmakers to reach a deal would shake confidence in the government to fulfil one of its basic duties: keeping the government open and funded.

Despite a deal being struck that raised the debt limit, Fitch Ratings later downgraded its AAA credit rating for the U.S. government, citing the growing partisan divide that’s making it more difficult to set fiscal policy.

Another credit rater, Moody’s, said as much in a report this week that said a shutdown would “underscore the weakness of U.S. institutional and governance strength.” It also said the U.S. lacks a focus on medium-term fiscal policy in contrast to other AAA-rated countries — including Canada and Germany — instead exacerbating political tensions through short-term solutions to spending.

The report warned mass transit and public housing authorities, defence contractors and state and local governments would feel the brunt of a U.S. government shutdown.

The U.S. Chamber of Commerce also warned that “a well-functioning economy requires a functioning government.”

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Goldman Sachs has estimated that a shutdown would reduce economic growth by 0.2 per cent every week it lasted, but growth would then bounce back after the government reopens.

The last government shutdown, in 2019, lasted 34 days.

A new Conference Board report on Tuesday found U.S. consumer confidence dropped to a four-month low in September. While economists said those fears were spurred mostly by higher prices and rising fears of a recession, they noted “the political situation” in Washington was also raised by respondents.

Canada’s major banks have not yet publicly commented on whether the shutdown is creating ripples in the markets north of the border. Economists say it may take an actual shutdown for any panic to set in.

“The business community in Canada is pretty much ignoring this looming shutdown because we’ve seen this before again and again, with a shutdown avoided at the last moment,” University of British Columbia economics professor Werner Antweiler told Global News in an email.

“The disruptions would be so large and devastating that it is hard to see that the current Republication leadership in the House of Representatives would not find a last-minute way to prevent it.”

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Antweiler said Canada could be “severely impacted” if a shutdown affects international trade, but noted steps have been taken in the past to avoid such a scenario.

Those include declaring U.S. Customs and Border Patrol agents at the Canada-U.S. border as essential workers, requiring them to work without pay in order to keep cross-border trade routes open.

The U.S. Department of Homeland Security did not answer Global News’ request for comment on whether such a move will be made in the event of a shutdown this time.

Davidoff, the University of British Columbia professor, said any Canadian firm that relies on U.S. government contracts will be impacted if payments can’t be immediately fulfilled.

Both he and Antweiler agreed that the Canadian impacts would be relatively low at first, but a prolonged shutdown would rock investor and consumer confidence on both sides of the border. Canadian investors may begin to look elsewhere if the U.S. continues to look unstable, they suggested.

“It all depends then on how long the shutdown would persist,” Antweiler said.

—with files from Reuters