Federal agencies began scaling back operations Thursday as a funding lapse took effect after Democrats in Congress refused to approve a short-term spending measure that omitted expanded health-care tax credits, and Republicans resisted including the provision. The partisan standoff — centered on Democrats’ push to extend refundable tax credits designed to lower insurance premiums for millions of Americans — turned routine funding negotiations into a full-blown shutdown.

The political calculus hardened after weeks of intense, closed-door bargaining. Democrats said they would not pass a continuing resolution that failed to address what they describe as an urgent affordability crisis for families paying rising premiums. “We will not sign off on a plan that leaves Americans on the hook for skyrocketing health costs,” a top Democratic aide said. Republicans countered that including new or extended credits would dramatically expand the federal deficit and that the matter could be addressed in later budget talks. “We’re willing to keep the government open, but not at the price of an open-ended spending commitment,” said a senior Republican senator.

The White House, which played a central role in negotiations, declined to reach a compromise. President Trump had signaled reluctance to accept an open-ended entitlement-like expansion, according to senior administration officials. With neither side yielding, furlough notices were issued to tens of thousands of nonessential federal employees, and key services including national park operations, some visa processing and grant disbursements were curtailed.

Economic and diplomatic repercussions were swift. Treasury and defense officials warned Congress of disruptions to reimbursements and procurement contracts, while U.S. partners in Europe and Asia monitored the situation for potential impacts on scheduled diplomatic engagements and military cooperation. Market reaction was cautious but noticeable: global investors, already alert to Fed policy shifts, factor in the risk that prolonged domestic gridlock could influence U.S. bond markets and business confidence.

Legal and institutional strains layered onto the political fight. In a related development, the Supreme Court allowed Federal Reserve Governor Lisa Cook to remain on the board while litigation over the validity of certain appointments continues, averting immediate disruption at the central bank. The court’s temporary order reduced the likelihood of an abrupt policy vacuum on monetary issues amid fiscal turmoil.

Analysts said the shutdown is as much about messaging as policy. Democrats have seized on health-care affordability to distinguish themselves ahead of the midterms and to mobilize core constituencies, while Republicans have framed the fight as a defense of fiscal restraint. “Both parties are playing to their bases,” said Allison Reed, a government affairs analyst. “But the real consequences fall on ordinary Americans and on institutions that rely on predictable U.S. funding.”

Historically, shutdowns have forced hurried, sometimes messy resolutions. Whether the present impasse will yield to last-minute bargaining remains uncertain. For now, federal employees, beneficiaries of government programs and international partners are left to absorb the immediate effects of a political conflict over how to pay for the country’s safety net.