US govt shutdown begins as deadlocked Congress flails

The US government began its first partial shutdown in 17 years, idling as many as 800,000 federal employees, closing national parks and halting some services after Congress failed to break a partisan deadlock by a midnight deadline.

Congressional leaders have scheduled no further negotiations on spending legislation, raising concerns among some lawmakers that the shutdown could bleed into the more consequential fight over how to raise the US debt limit to avoid a first-ever default after October 17.

Chances of a last-minute deal - seen so often in past fiscal fights - evaporated shortly before midnight as the House stood firm on its call to delay major parts of President Barack Obama's health care law for a year. Senate Democrats were equally firm in refusing to concede and planned a morning vote to reject the House's call for formal talks.

"It is embarrassing that these people who were elected to represent the country are representing the Tea Party," Senate Majority Leader Harry Reid, a Nevada Democrat, said after midnight. "This is an unnecessary blow to America."

House Speaker John Boehner, speaking after 1 am in Washington, called on Senate Democrats to come to the negotiating table.

"Let's resolve our differences," Boehner, an Ohio Republican told reporters. "The House has voted to keep the government open, but we also want basic fairness for all Americans under Obamacare."

Lost output
A partial federal government shutdown would cost the US at least $300 million a day in lost economic output at the start, according to IHS Inc. That's a fraction of the country's $15.7 trillion economy, and the effects probably will grow over time as skittish consumers and businesses stay on the sidelines.

"You don't get to extract a ransom for doing your job, for doing what you're supposed to be doing anyway or just because there's a law there you don't like," Obama said at the White House yesterday. "Time's running out."

Abroad, UK Prime Minister David Cameron, whose Conservative Party is a traditional Republican ally, said the US political crisis poses a threat to global growth.

Growth risk
"It is a risk to the world economy if the US can't properly sort out its spending plans," Cameron told the BBC in Manchester on Tuesday. In Korea, the finance ministry said it could make investors more risk adverse and fuel capital outflows from emerging markets.

Futures on the Standard & Poor's 500 Index rose 0.4 per cent as of 11 am in London, signaling that the benchmark may reverse part of its 1.7 per cent slide during the past six trading sessions.

Treasury 10-year yields rose 3.9 basis points to 2.65 per cent. The S&P GSCI Index of 24 commodities fell 0.3 per cent, declining for a third day, as West Texas Intermediate crude oil retreated 0.2 per cent to $102.15 a barrel.

During the partial government shutdown, many essential government operations will cease. Internal Revenue Service call centres will close and more than 90 per cent of Environmental Protection Agency workers will stay home. National parks and museums will be shuttered.

Other services will continue uninterrupted. Social Security and Medicare benefits will be paid. US troops will remain at their posts around the world and will be paid under a bill Obama signed yesterday. Air-traffic controllers and airport security screeners will keep working.

Health-law enrollment
The shutdown comes on the first day of enrollment in the exchanges mandated under Obama's Affordable Care Act, itself at the heart of the fight. Enrollment will continue on Tuesday despite the shutdown, because it's paid for out of mandatory funding not affected by the lapse, US officials said.

In the end, the final hours before the shutdown were marked by a combination of legislative procedure and partisan vitriol. House Republicans said they would appoint members to a committee meant to negotiate a compromise between the Republican and Democratic positions - something several rounds of votes didn't accomplish.

"I'd be surprised if it went for weeks," said Senator Bob Casey, a Pennsylvania Democrat. "But I don't think it's just going to resolve itself in a day or two."

Before midnight, the US Office of Management and Budget issued guidance to agencies, telling them how to go forward when money ran out at midnight in Washington.

Confrontational strategy
Boehner, who said he didn't want a shutdown, kept bringing bills backed by hard-liners in his party to the floor for votes. Twice yesterday, the House voted to send a bill delaying Obamacare to the Senate. Twice, the Senate rejected the House plans.

Republicans remained divided between a group that says the party's confrontational strategy is doomed and a faction railing against Obama's refusal to negotiate.

"I would like see some road in which Barack Obama is actually participating in the process," said Representative Tim Huelskamp, a Kansas Republican.

Congress and Obama have been at loggerheads on fiscal policy since Republicans won control of the House. They took several disputes to the brink, including a potential government shutdown in April 2011, the debt ceiling in August 2011 and the expiration of tax cuts in December 2012.

Cruz Uprising
In each case, lawmakers reached an agreement to prevent the worst possible outcome. Most recently, the House passed a tax bill Jan. 1, hours after income tax rate increases took effect.

Boehner and House Majority Leader Eric Cantor, a Virginia Republican, tried to avoid this fight, offering a first proposal last month that would have let the Senate send a spending bill without conditions right to Obama.

They faced an uprising from Republicans, urged on by Senator Ted Cruz of Texas, who insisted on language that would defund Obamacare.

The House scaled back its demands twice, each time running into a party-line objections from Senate Democrats and Obama, who increasingly saw the spending bill as a prelude to the debt-ceiling negotiations.

"These Tea Party people are insatiable when it comes to confrontation and shutting down the government," said Senator Richard Durbin of Illinois, the chamber's second-ranking Democrat. "This has got to come to an end. We can't continue to lurch from one crisis to another."

Fighting Corners
The House's final volley, passed last night, would have delayed for one year the mandate that individuals purchase health insurance and would end government contributions to the health insurance of lawmakers, congressional staff members and political appointees.

Democrats see a path out of this crisis. They want Boehner to allow the House to vote on the Senate's version of the spending measure, which would extend government funding through Nov. 15 and exclude any Obamacare conditions.

Republicans said they want to force Obama to accept some concessions on his signature health-care law.

Some strategists expect the shutdown to drive both parties deeper into their respective fighting corners as they assess the economic and political fallout, hardening positions at least temporarily before a resolution can be reached.

Deal Prerequisite
"It's clear that there are rising concerns within the House Republican caucus about how all of this is being handled, but I believe that for right now, the insurgents have the upper hand and they're not going to go away without a fight," said Democratic communications consultant Jim Manley of Washington-based Quinn Gillespie & Associates LLC, a former top aide to Reid.

Nor do Democrats have any interest in compromising with Republicans until their internal fighting about what strategy to pursue subsides.

At the same time, many Republicans have come to believe that shutting the government for a brief time is a prerequisite for any deal.

"It would be better for Republicans if there were no shutdown, but in many ways it can be a useful way to lance the boil," before the fight over raising the debt ceiling, said Republican strategist John Feehery, also of Quinn Gillespie. He was a top aide to former House Speaker Dennis Hastert of Illinois.

"The debt limit is much more important, and hopefully the shutdown can release some of the pressure and helps them get to a broader agreement," Feehery said. "That remains to be seen."

Pentagon chief says shutdown hurts US credibility with allies

The US government shutdown will undermine American credibility abroad and lead allies to question its commitment to treaty obligations, the US defence chief warned on Tuesday as he prepared to put 400,000 civilian workers on unpaid leave.

Defense Secretary Chuck Hagel (pictured), who was visiting South Korea to celebrate the two nations' 60-year-old mutual defence treaty, said Pentagon lawyers were analysing a new law passed by Congress to see if additional civilian workers could be spared unpaid leave.

But for the moment, when the department's 800,000 civilians report to work on Tuesday, approximately half will be told they are not exempted by law from the government shutdown and asked to go home, Hagel told reporters.

The Pentagon and other US government agencies began to implement shutdown plans on Tuesday after Congress failed to reach a deal to fund the federal government in the new fiscal year beginning October 1.

A last-minute measure passed by Congress and signed by President Barack Obama will ensure the Pentagon's 1.4 million military employees worldwide will continue to receive paychecks during the shutdown. They were required to work under prior law but would not have been paid until Congress approved funding.

The new law also ensures that civilians who are required to work despite the shutdown will also be paid, Hagel said. But under law, anyone not directly involved in protecting lives and property are not considered exempt and must be placed on leave.

"Our lawyers are now looking through the (new) law that the president signed ... to see if there's any margin here or widening in the interpretation of the law regarding exempt versus non-exempt civilians," Hagel said. "Our lawyers believe that maybe we can expand the exempt status."

Hagel said he didn't know how many people the department might be able to call back from leave, or how long it would take to reach a determination, but he said it was "the priority" in the Pentagon's general counsel's office.

The shutdown has direct implications for the staff with Hagel on his week-long trip to South Korea and Japan. They are considered exempt while supporting the secretary's mission abroad, but that status may change for some when they return home on Friday, Pentagon spokesman George Little said.

The U.S. defense chief said he broke away from celebrations in South Korea on Monday to discuss the shutdown by phone with Deputy Defense Secretary Ashton Carter and Pentagon Comptroller Robert Hale. He said they would hold another round of talks on Tuesday as the shutdown went into force.

"We'll probably have to furlough about 400,000 DoD (Defense Department) civilians when they come to work here in a couple of hours," Hagel said. "Those that have been designated non-exempt will be told and will be asked to go home."

The Pentagon chief said since arriving in Seoul on Sunday night, he had been questioned by South Korean officials about the threatened shutdown and why it seemed likely to take place.

"It does have an effect on our relationships around the world and it cuts straight to the obvious question: Can you rely on the United States as a reliable partner to fulfill its commitments to its allies?" Hagel told reporters.

"Here this great republic and democracy, the United States of America, shuts down its government," he added. "The Pentagon, even though we are (partly) exempted, the military has no budget. We are still living under this dark cloud of uncertainty not knowing what's going to happen.

"It does cast a very significant pall over America's credibility with our allies when this kind of thing happens. It's nonsensical ... It's completely irresponsible," Hagel said.

He urged Congress to "find a new center of gravity of responsibility and start to govern as is their responsibility."