Breaking with convention during a government shutdown? U.S. Treasury Secretary says payment order will be adjusted to prioritize military payroll

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U.S. Treasury Secretary Besant stated that the Treasury Department is adjusting the flow of funds within the system to ensure the military is paid on time, a move that stands in stark contrast to previous statements by her predecessor, Yellen. Yellen had previously said the Treasury's system could not prioritize different types of spending.

As the U.S. federal government shutdown entered its 13th day, on Monday, October 13, Eastern Time, Besant told the media: "We have to set payment priorities, we have to delay some payments, so that our brave men and women in uniform can get their paychecks." This statement was seen by market participants as "an unconventional" move.

Earlier this month, a report by Goldman Sachs noted that the military's payday on October 15 was seen as a key juncture in the government shutdown. If the shutdown continues by then, active-duty service members will miss out on their entire paychecks—something that has never been allowed to happen before.

Commentators believe that if the Treasury really does set payment priorities, such actions will have significant implications for future U.S. government debt ceiling negotiations, reinforcing Wall Street’s expectations that the Treasury would prioritize payments on principal and interest of U.S. debt.

Besant Contradicts Her Predecessor, Admits Ability to Adjust Payment Order

Besant's statement differs sharply from that of former Treasury Secretary Yellen. In January 2023, Yellen stated explicitly: "The Treasury's system is designed to pay all bills on time, not to prioritize one kind of spending over another."

A month later in February 2023, Yellen further warned that if Congress failed to act on the debt ceiling in time, "the federal government would be unlikely to make payments to millions of Americans, including military families and seniors relying on Social Security."

In a letter from September 2021, several former Treasury secretaries also supported the view that the Treasury could not prioritize some payments over others. However, Besant's statement this Monday indicates that in the special circumstances of a government shutdown, the Treasury may in fact make such adjustments.

Vice President Says "Unconventional" Means Used to Ensure Military Pay

U.S. Vice President Vance said in a media interview last Sunday that the government was "doing some fairly unconventional things." Vance said: "We are confident that we have identified a legal path to do this."

When asked if the funds for military pay would come from revenue generated by Trump's tariff hikes, Vance replied: "Part of the funds will come from cutbacks in other areas. A large portion will come from IRS revenue—from tariff revenue, as well as income tax revenue. This will enable us to pay the military."

Last Saturday, U.S. President Trump posted on his social media platform that he had instructed Secretary of Defense Hegseth to use "all available funds" to ensure the military receives paychecks on time.

October 15 Becomes Key Juncture

Goldman Sachs Chief U.S. Political Strategist Alec Phillips pointed out in a report last week that the U.S. government shutdown could last several weeks, but is unlikely to extend beyond the military payday on October 15.

Phillips predicted that if the shutdown lasts until October 15, active-duty military will miss their full paycheck, something that has never been allowed to happen before. Goldman Sachs believes very few people would want to see that occur.

Phillips expects the House and Senate to vote every day or two, with the key being how many Democrats will change their stance to support reopening the government.

According to Wallstreetcn, as of Monday, prediction platform Polymarket showed the probability of the shutdown ending on or after October 15 had exceeded 99%, while the chance of ending by October 14 was less than 1%.

Far-reaching Impact on Debt Ceiling Negotiations

Wrightson ICAP Senior Economist Lou Crandall said Besant’s comments "absolutely" strengthen Wall Street's expectations that the Treasury will prioritize principal and interest payments. This view is highly significant for future debt ceiling showdowns.

Crandall noted that, unlike debt ceiling standoffs, the current problem facing the federal government is not the risk of running out of cash. "The current issue seems to be whether, without Congressional appropriations, the government can find a legal basis to pay some salaries but not all salaries."

Right now, the Treasury is still making certain payments, such as Social Security beneficiaries and bondholders' interest, and these do not require annual Congressional funding approvals.

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