Federal Budget Uncertainty Weighs On Economy

Oct 2, 2011

Welcome to Fiscal Year 2012...such as it is.

On each Sept. 30, the nation wraps up its old budget, and on Oct. 1, it starts a fresh spending cycle. Or at least, that's what is supposed to happen.

But once again, Oct. 1 has come and gone, and the country still has no formal budget in place. Instead, Congress last week approved a stopgap funding bill to keep the government operating temporarily, just as it has done time and again since the 1970s.

For the more than two million civilian federal workers, it has become the norm to start work on the first Monday of October, not knowing what will happen to their agencies' budgets: Will there be spending cuts? Will there be money to purchase new equipment? Will there be raises?

In fiscal 2011, Congress did not complete the final budget until April 15, 2011 — a full six and a half months into the 12-month cycle.

This year, Congress had to punt again. On Thursday, the House approved a stopgap spending bill to keep the government open — until Tuesday. That marked the 157th temporary spending bill used to plug a budget hole since 1977, according to the nonpartisan Congressional Research Service.

When lawmakers resume their work on Tuesday, they will take up yet another spending extension — this one lasting until Nov. 18.

The lack of a final budget is particularly troublesome for the weak U.S. economy, according to Diane Swonk, chief economist for Mesirow Financial, a financial services firm in Chicago.

"We're already skating on thin ice," Swonk says. "The last thing you need now is more uncertainty."

Matthew Slaughter, a Dartmouth professor and an economist with the National Bureau of Economic Research, says the annual budget mess hurts the economy in several ways.

First, it dampens the consumer confidence of millions of government workers and contractors. "To varying degrees, they have to worry about the stability of their paychecks," he says. "That kind of risk tends to make those households more uncertain, and that surely matters" when workers are deciding whether to purchase, say, a home or car.

Slaughter says the budget battles also hurt workers in the private sector. "The annual drama and the countdowns make people worry about the basic competence of the government, and that hurts overall confidence in the economy," he says.

Budget battles have other hidden costs, Slaughter adds. For example, federal agency leaders who should be developing policies to help the economy are instead "putting their energy into contingency planning in case there is a government shutdown," he says. Also, the most highly skilled federal workers may decide to leave government because they may become demoralized, he notes.

And finally, agencies cannot move forward with major projects that could improve infrastructure, Slaughter says. For example, the Federal Aviation Administration could be delayed in purchasing equipment to upgrade the air-traffic-control system because of budgeting uncertainty, he says.

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