While President Joe Biden (D) and Speaker of the House Kevin McCarthy (R) have agreed to and passed a deal, the near-disaster of a federal default highlights expansive federal intervention and support in the US territories. A federal default would delay agency funding, Social Security benefits, Medicare, and Medicaid. The federal government would be forced to pick and choose which debts to pay and programs to fund. A default could cause a recession, unemployment, and federal spending cuts that would damage both the domestic and global economy.
Regions with large federal government aid would be heavily affected, including the territories that depend on the federal government for funding in infrastructure, benefits, and economic support. Territories such as Guam, with several federal installations and military bases, would also be hit hard. Moody’s Analytics noted, “Disruptions to Medicare and Medicaid payments are a problem for the healthcare industry and most significantly smaller hospitals and doctors’ offices with little financial wiggle room, especially in rural areas.[…] Other government transfers to households, including Social Security and unemployment insurance benefits, are also impacted.”
The territories are members of many high-profile programs, including social insurance (Social Security and disability benefits), medical benefits (Medicare and Medicaid), and higher education grants. Additionally, the Northern Mariana Islands are eligible for unemployment Supplemental Security Income benefits. Territory programs with federal funding, including unemployment compensation, public assistance programs such as TANF, and medical assistance programs, would be heavily affected.
Many of the territories, which have been receiving new federal funding and investments to update infrastructure, would face reduced federal spending instead. In Puerto Rico, the federal government has invested more than $90 billion in infrastructure, healthcare, hurricane relief, and other federal programs, all of which would be delayed or reduced. As the territories are reliant on federal economic support, a federal default and credit downgrade could tank island economies. Economist José Caraballo Cueto highlighted the consequences of federal spending cuts, saying, “There are a lot of federal funds and federal programs in which Puerto Rico participates, from housing to municipalities, there are funds for non-profit institutions, funds for the Department of Housing, for the Department of Education. It is in these cuts that Puerto Rico can be affected, especially now that the economy has increased its dependence on federal funds.” As funds for the territories are lower-priority expenses, territories would face decreased funding for infrastructure, social security payments, nutrition assistance, social programs, and healthcare grants.