In a matter of weeks, Gov. Phil Murphy and state lawmakers will be hammering out a deal on a new annual budget that will fund everything from property-tax relief to aid for K-12 public schools.  

But before they do, ongoing political discord in Washington, D.C. concerning paying the federal government’s bills threatens to dramatically alter the economic landscape in New Jersey and across the country.   

Under a worst-case scenario, a prolonged impasse could force the federal government to default on upcoming debt payments, something economists have predicted could derail the U.S. economy and cause a surge in unemployment, including in New Jersey.   

However, even a compromise between Democratic President Joe Biden and House Republicans on raising the national debt limit could result in major financial consequences for New Jersey, including federal spending cuts sought by Republicans that experts say would likely be felt at the state level.  

A clawback of unused aid the federal government sent to New Jersey and other states in response to the COVID-19 pandemic remains on the table as meetings in the nation’s capital are expected to continue this week. In New Jersey, roughly $1 billion in federal aid remains unallocated by Murphy and lawmakers, according to a recent accounting.  

For their part, Murphy and other Democrats in New Jersey have been taking aim at how a series of spending cuts House Republicans demand in exchange for lifting a statutory debt limit would hit federal programs relied upon by many New Jersey residents. 

Services for thousands of New Jersey veterans and other vital programs like mental health support for students are now hanging in the balance, Murphy has warned. 

Budget negotiations

At the heart of the dispute playing out in the nation’s capital is the insistence by Speaker Kevin McCarthy and the House Republican majority that voting to increase the nation’s debt ceiling to pay off already authorized federal spending commitments should be tied to future, non-military spending cuts that Biden and other Democrats oppose.  

Under different circumstances, the legislation seeking such budget cuts, which passed in the House last month, would simply die in the Democratic-controlled Senate since it is not supported at all by Democrats.  

But House Republicans are refusing to allow any vote on the debt ceiling without their preferred spending cuts attached to it, thus threatening the nation’s first-ever default, and the economic consequences that such an event would trigger. 

According to U.S. Treasury Secretary Janet Yellen, the federal government could run out of money as early as June 1 if the debt limit is not lifted before then. 

If talks break down and a default occurs, economists have predicted there could be a major sell-off that would roil financial markets. A surge in unemployment would also occur, with an estimated nearly 200,000 job losses in New Jersey alone during a prolonged impasse, according to a recent analysis published by Moody’s Analytics.   

Also hanging in the balance is pending budget negotiations between Murphy and Democratic legislative leaders in the New Jersey State House.  

On Wednesday, state Treasurer Elizabeth Maher Muoio is scheduled to appear before the Assembly Budget Committee for the final time before the start of high-level budget negotiations that typically take place in the run up to the start of a new fiscal year on July 1.  

The Murphy administration’s latest revenue forecasts for the 2024 fiscal year and the remaining weeks of the current fiscal year do not account for the impact of a national default on its debt.  

‘Inseparably linked’

While states operate independently from the federal government, Rebecca Thiess, a manager with The Pew Charitable Trusts’ fiscal federalism project, said state and federal budgets are “inseparably linked.” 

“Virtually any federal funding disruption or budget reform stemming from the impasse will affect states’ finances,” Thiess said. 

“On average, one-third of state revenue comes directly from federal grants to help pay for public services like health care, education, and infrastructure,” she said. “Federal spending also helps sustain states’ economies and tax revenues through things like military contracts, employee wages, and payments to individuals, including food stamps and social security benefits.” 

Beyond the budget itself, Murphy and state lawmakers in recent years have also been using the state budget approval process to reach agreement on ways to spend down portions of the more than $6 billion in federal pandemic aid New Jersey received in 2021 through the federal American Rescue Plan Act.  

But in addition to spending cuts, House Republicans have also been seeking to claw back any unspent pandemic aid, and this is an area where Biden has signaled he may be willing to compromise as high-level talks between the two sides are expected to continue this week. 

‘No matter what happens, we in New Jersey will be ready to stand with veterans, small businesses, people depending on Social Security, and mothers of small children who need nutritional assistance.’ — Assembly Speaker Craig Coughlin. 

Earlier this year, experts from New Jersey’s nonpartisan Office of Legislatives estimated more than $1 billion out of New Jersey’s overall share of aid from the American Rescue Plan Act remains unallocated.  

Moreover, the state auditor reported last month New Jersey had only expended a little over $1 billion out of the more than $5 billion in federal pandemic aid that Murphy and lawmakers have previously appropriated.  

Murphy’s office declined comment on the potential for claw backs last week. But Murphy spokeswoman Jennifer Sciortino repeated concerns about the House Republicans’ push for the federal spending cuts – and their willingness to risk a default to get them.  

“This move is beyond reckless and would essentially hold the economy hostage in an attempt to cut veterans health care, slash mental health services and make it even more difficult for families to afford everything from housing to higher education,” Sciortino said.   

Assembly Speaker Craig Coughlin (D-Middlesex) is also backing Biden, saying in a statement that the president is “doing the right thing.” 

“President Biden has demonstrated leadership as he works to an agreement and it’s time for Kevin McCarthy and his extremist colleagues to step up,” Coughlin said. 

“No matter what happens, we in New Jersey will be ready to stand with veterans, small businesses, people depending on Social Security, and mothers of small children who need nutritional assistance,” he said.