By David Enna, Tipswatch.com

The U.S. government is highly likely to shut down on Wednesday, with the beginning of a new fiscal year. This is political theater, and the real danger is that the leading actors are both Republicans and Democrats, perfectly willing to go to the brink.

Escalating the threat, the Trump administration this week told federal agencies to prepare for mass firings (not furloughs) if the government shuts down. The Office of Management and Budget said the firings should target any federal program that is “not consistent with the President’s priorities.” From the Politico report:

The move marks a significant break from how shutdowns have been handled in recent decades, when most furloughs were temporary and employees were brought back once Congress voted to reopen government and funding was restored.

Politico quoted an OMB official saying programs that will continue include Social Security, Medicare, veterans benefits, military operations, law enforcement, Immigration and Customs Enforcement, Customs and Border Protection and air traffic control.

Scene II: Cue the Democrats, who pushed back at the firing threat. Or maybe I should say “shoved back,” with House minority leader Rep. Hakeem Jeffries telling the budget director to “get lost.”

Wonderful, huh? As things stand now, a government shutdown — whether short- or long-term — seems a certainty. Both political parties are welcoming the crisis for potential political gain.

What’s this all about?

The government will shut down Wednesday unless lawmakers are able to break their impasse and reach a deal to keep federal funds flowing. Republicans have offered a plan to maintain current spending levels through Nov. 21. That plan passed the House by a 217-212 vote, but was rejected the Senate, where 60 votes are needed for passage.

Democrats have offered an alternative to keep current spending going through Oct. 31 — but with a rider to add more than $1 trillion in spending to extend Obamacare subsidies that are set to expire at the end of the year. Democrats also want to roll back already-approved Medicaid cuts. The GOP says “no.”

Democrats are using the shutdown threat as leverage to restore healthcare spending that was eliminated in the One Big Beautiful Bill (OBBB). Republicans are highly unlikely to agree to that, but have offered to negotiate “in the future” once the shutdown is averted. But at that point Democrats would no longer have leverage.

Behind this is a failure by Congress to to pass a collection of 12 spending bills that would keep the government funded through fiscal 2026. Without approval of those bills, a continuing resolution is needed to keep much of the government going. So far, not one of the spending bills has passed both houses of Congress, which means a government shutdown would be widespread.

The most recent government shutdown occurred during President Trump’s first term, from Dec. 22, 2018, to Jan. 25, 2019.

Treasury issues aren’t threatened

This isn’t a “debt-limit crisis,” like we saw in 2023. The OBBB, passed in August, increased the U.S. debt limit by $5 trillion. So the Treasury will be able to continue to issue Treasury bills, notes and bonds, along with U.S. Savings Bonds. For that reason, you aren’t seeing any disruption in 4-week T-bill yields:

If investors believed T-bills would not be paid off at maturity, you would be seeing the 4-week yield rising sharply. That’s not an issue in this crisis. Instead, yields are falling in line with the Federal Reserve’s decision to cut short-term rates on Sept. 17.

I repeat: There is no risk of a government default, which would be far more serious than a shutdown.

However, some Treasury officials are likely to be furloughed (or maybe even fired), and others will be required to work without pay during the shutdown. That means Treasury services and statistical collection and reporting are going to be impaired.

For example, a shutdown could delay release of the crucially important September inflation report, due Oct. 15. That report will determine both the I Bond’s new variable rate and next year’s cost-of-living adjustment for Social Security. From a Reuters report:

A prolonged shutdown risks delaying or canceling key economic data releases investors use to assess macroeconomic trends, such as the monthly employment and inflation reports, analysts at Nomura said in a note this week.

Sept 30 update: Recent reporting from many sources indicates that a government shutdown will delay statistical reporting by the Bureau of Labor Statistics. The Department of Labor (which includes the BLS) has prepared a contingency plan for the shutdown:

• The Labor Department’s working employees will be reduced from 12,916 to 3,141.
• The BLS is listed in the group that will “completely cease operations.”
• Economic data that are scheduled to be released during the lapse will not be released.
• All active data collection activities for BLS surveys will cease.
• A reduction in quality of data collected might impact the quality of future estimates produced.
• The BLS website will not be updated with new content or restored in the event of a technical failure during a lapse.

What happens in a shutdown?

The potential for large-scale firings by the Trump administration adds a unique twist to this crisis. Those firings might not be legal and court challenges would be likely. However, widespread furloughs — meaning no pay even if you are required to work — are going to happen.

The non-partisan Committee for a Responsible Federal Budget prepared a Q&A on government shutdowns earlier this year.

In prior shutdowns, border protection, in-hospital medical care, air traffic control, law enforcement, and power grid maintenance have been among the services classified as essential, while some legislative and judicial staff have also been largely protected. Mandatory spending that is not subject to annual appropriations – such as for Social Security, Medicare, and Medicaid – also continues.

Some examples of the likely effects:

• Social Security. Benefit payments would go out, but benefit verification and card issuance would cease.
• Food inspection. During the 2018-2019 shutdown, the FDA restored some food inspections a few weeks into the funding lapse for products that were considered high-risk.
• National parks. In 2013, the National Park Service turned away millions of visitors to more than 400 parks, national monuments, and other sites. NPS estimated the shutdown led to more than $500 million in lost visitor spending.
• Air travel. During the 2018-2019 shutdown, air travel was strained as a result of air traffic controllers and TSA agents working without pay.
• Health. The National Institutes of Health (NIH) would be prevented from admitting new patients or processing grant applications.
• Environmental. During the 2013 shutdown, the EPA halted inspections for 1,200 sites that included hazardous waste, drinking water, and chemical facilities.
• IRS. Essential IRS functions would continue, but some workers would be furloughed and others would be required to work without pay. I suspect some IRS auditors could get ornery in this scenario.

Will the government save money?

Hard to say this time, given the threat of widespread firings instead of furloughs. Generally, after a shutdown concludes furloughed workers receive back pay, even if they were not working. The CRFB says this:

While many federal employees are forced to be idle during a shutdown, they … are now guaranteed back pay, negating much of those potential savings. OMB official estimates of the 2013 government shutdown found that $2.5 billion in pay and benefits were paid to furloughed employees for hours not worked during the shutdown. …

Shutdowns also carry a cost to the economy. The Congressional Budget Office (CBO) estimated that the 2018-2019 shutdown reduced Gross Domestic Product (GDP) by a total of $11 billion, including $3 billion that will never be recovered.

What’s the solution?

Since both sides are digging in — aggressively — it seems highly likely that the government will shut down Wednesday. The blame game is already at 100 decibels with Republicans saying Democrats are refusing to pass a “clean continuing resolution” and Democrats saying Republicans are refusing “to lower health care costs for Americans.”

I suspect the Republicans will win in the end, getting a continuing resolution to fund the government into November. There is no way the GOP will accept a $1 trillion increase in government spending by rolling back legislation passed two months ago.

The Trump administration’s threat to fire federal workers in areas “not consistent with the president’s policies” was a nuclear escalation — and probably not even necessary. But it could indicate the White House will welcome an extended government shutdown.

Eventually, it could take a stock or bond market revolt to bring the crisis to a close.

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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.