Debt ceiling deadlock puts government spending at risk

A deadlock on the high-stakes debt ceiling in Washington could have ripple effects on state spending plans that count a lot on federal assistance to fund a variety of social programs and transportation projects.

States across the country depend on a constant flow of federal government cash to supplement their own tax revenues, but this financial aid pipeline is under threat as Congress waits for a looming deadline to avert the country’s first-ever default. .

Political experts say failure to suspend or increase the debt limit could disrupt state-level spending, especially with regard to the recently enacted $ 1.2 trillion infrastructure law.

“The fact that places are in a better fiscal position than they expected makes the direct effects a little less imminent, but it will have big effects if places try to think about using one of these funds. ‘infrastructure’ or money earmarked for social services, said Kim Rueben, who specializes in funding state and local governments to Urban Institute.

“And so in part we’re playing this chicken game with what looks like a nuclear bomb. We really need the debt limit ceiling raised because of what it’s going to do for the economy overall – [a default] could have a negative effect on state and local governments, but it can also disrupt all kinds of other financial and banking markets. “

The federal government provides approximately 750 billion dollars in annual aid to states, funding programs ranging from Medicaid, which covers about 75 million Americans, to food stamps, used by about 42 million households. It also includes funding for schools, roads, transportation, and various housing programs for low-income families.

Many of the states that count the most on federal funding – over 40 percent – are from Republican-led states such as Alaska, Louisiana, Mississippi and Montana, in large part due to low tax rates. Some Democratic-led states also receive a large chunk of federal dollars: about 36% of New York’s budget comes from federal aid, while California sees about 30% of its budget backed by Washington.

“Each state depends on federal funding for a fairly good chunk of its budget,” said Rebecca Thiess, state policy expert at Pew Charitable Trusts. “Since the Great Recession, federal funding has stayed essentially a third of state budgets. So if you think about where states get their money – it’s taxes, it’s fees, local funds, service charges – but then the federal government has that important role. “

Overall, states are on a solid financial footing, according to one report last week from the National Association of State Budget Officials. Spending on health care, education and transportation has increased by more than 16% this year from 2020, and federal funds to states have risen sharply, increasing by almost 36%, according to the report.

Thiess and other experts have warned that it’s difficult to predict how things would turn out since the country has never defaulted on its debt, but cuts to federally funded social safety net programs over which millions of people count to make ends meet is a major concern.

“We have no experience of a federal default,” said Jared Walczak, vice president of state projects at the Tax Foundation. “We don’t want a situation where there is uncertainty as to whether the federal dollars are going to flow.”

In recent months, Senate Republicans have signaled Democrats will have to go it alone to raise the debt limit at a time when the party is already struggling to push the $ 1.75 trillion Build Back Better bill. dollars from President Joe Biden to Congress.

“We are focused on doing this in a bipartisan fashion,” Senate Majority Leader Chuck Schumer, DN.Y. said this month, referring to the debt limit discussions with his counterpart in the GOP, Senate Minority Leader Mitch McConnell.

The Kentucky Republican said in October his party would not work with Democrats to raise the debt ceiling in December, but he recently softened his tone, saying this month: “We’ll figure out how to avoid default. . We still do.

Congress came close to a potential default in October before lawmakers, including a handful of Senate Republicans, raised the debt ceiling by $ 480 billion to allow the government to continue paying its bills.

Treasury Secretary Janet Yellen warned lawmakers earlier this month that the country would not be able to pay its bills soon after December 15 and urged lawmakers to act quickly to avoid default.

Yellen said “there are scenarios in which the Treasury would end up with insufficient remaining resources to continue funding US government operations beyond” December 15.

And while state political experts are optimistic that Congress will find a solution in the coming weeks, a

“The federal default never happened and everyone is hoping and expecting it doesn’t happen now,” Walczak said. “State programs wouldn’t stop if there was some delay in getting federal aid, but they obviously need to be able to fund those programs.

Comments are closed.