Congress has not passed any of its regular appropriations bills to fund the government after October 1. Therefore it ha to pass a continuing resolution (CR), which the Senate defines this way: "Legislation in the form of a joint resolution enacted by Congress, when the new fiscal year is about to begin or has begun, to provide budget authority for Federal agencies and programs to continue in operation until the regular appropriations acts are enacted." The Republican-led House has passed a CR that would defund the health care law. The Democratic-led Senate will surely reject it. If the chambers cannot agree, there will be a partial government shutdown until they do. The Wall Street Journal explains:
Q: Will the government really “shut down” on Oct. 1?
A: No. The government will not shut down, even if Congress does not pass a bill by Sept. 30. President Barack Obama will still live at the White House. The mail will still be delivered. Air traffic controllers and meat inspectors will still show up for work. There will, however, be a partial government shutdown if Congress doesn’t act. Hundreds of thousands of federal employees will be sent home without pay. National parks will close. Military service members very likely won’t get paid. The people answering the phone at the Internal Revenue Service and Social Security office might not be answering the phone anymore. If you need a new passport, you’ll probably be in trouble. The impact will be uneven, but there will be an impact. There was a partial government shutdown in 1995 and 1996, but this one could be bigger because Congress hasn’t passed any spending bills this year. More things will grind to a halt.
Q: Why wouldn’t the whole government just topple over?
A: Good question. There are two basic kinds of government spending. “Mandatory” spending is spending that is essentially on auto-pilot. Think of Social Security and Medicare benefits. “Discretionary” spending is money that must be approved by Congress each year. It’s “discretionary” spending that gets hit during a shutdown. Also, there are provisions in law that allow the government to continue protecting itself (so the military will still be in force, and border security will continue), as well as carry out other duties. And federal employees considered “essential” will still come in to work and get paid.AP explains, however that an even larger problem lies just beyond the CR fight. Every so often, the government has to raise the debt ceiling so that it can continue to borrow money. If it cannot do so, it starts to run out of cash.
A default would occur if the government is no longer able to borrow and has run out of cash to pay all the bills coming due. Then, the government has to rely on cash coming in to pay whatever bills it can.
Since the government has never defaulted, it's impossible to know for sure how it would behave. But it's commonly assumed that Treasury would make sure that it would meet interest payment so as to not alarm financial markets and prompt U.S. creditors to stop "rolling over" debt by reinvesting bonds when they mature.
"If the federal government actually were to default on its debt obligations, the full faith and credit of the U.S. government is in question and it can have devastating effects on Treasury's ability to borrow and on the stability of financial markets in general," said Keith Hennessey, former Director of the National Economic Council in the George W. Bush White House.
Earlier this year the GOP-controlled House passed legislation requiring Treasury to "prioritize" its obligations to pay interest payments and Social Security benefits first if there's not enough cash to pay all the bills.
But while it's relatively easy to prioritize interest payments, Treasury's computer systems aren't programmed in such a way that it'd be easy to pick and choose what payments to make.
In an internal review after the 2011 debt crisis, Treasury officials told an agency inspector general that best option in a cash crunch would be to delay payments. In other words, Treasury would figure out how much a particular day's bills cost and then pay those bills when enough cash came in. That would mean the government would quickly fall behind on its payments.