Government Shutdown: Another Test for the US Economy
As of this writing, there’s a very real possibility we’ll see a partial federal government shutdown in the US at 12:01 a.m. on October 1. House Republicans are split, with a small group of far-right lawmakers seeking to extract further spending cuts from the White House.
When Congress passed the Fiscal Responsibility Act in June alongside a compromise budget to raise the debt ceiling and avoid default, we figured there wouldn’t be another budget crisis until after the next presidential election. However, we failed to consider the deep divide within the Republican party and Kevin McCarthy’s tenuous hold on the speakership.
In keeping with the June budget deal, the Senate stands ready to pass the spending bills for the new fiscal year beginning October 1 with bipartisan support. But the votes aren’t there in the Republican-controlled House of Representatives. The House has also failed to pass a continuing resolution that would keep discretionary spending at current levels until new appropriations bills are passed. The Senate passed its own stopgap measure to fund the federal government through November 17, but the bill can’t move to the president’s desk without House approval.
The economic fallout from a government shutdown would depend on how big it is and how long it drags on, which is obviously hard to predict. Recent shutdowns have lasted anywhere from a few hours to 35 days in 2018–2019 (graph). The most recent shutdown was long, but only concerned a quarter of discretionary spending (about 380,000 government employees). The 2013 shutdown lasted 16 days, but funding to every agency was cut, impacting some 800,000 public servants. Unfortunately, today we’re looking at something more like the shutdown ten years ago. Of the 12 necessary spending bills, the House has only passed the one covering veterans affairs and military construction.
A shutdown wouldn’t affect most essential functions of the federal government; it would only impact discretionary spending that must be reauthorized by Congress every year. Cheques would continue to go out for major social programs like Medicare, Medicaid and Social Security, though other program services may be suspended. Military personnel and security officers at places like borders and airports would continue to report to work. Self-funded agencies like the US Postal Service and the Federal Reserve also wouldn’t be affected. The same goes for Congress and the White House. But a government shutdown could disrupt the collection and reporting of economic data, further clouding the economic picture.
The 2013 shutdown didn’t have a major impact on the economy, with no big quarterly drop in real GDP or domestic demand reported. There was a slowdown in the fourth quarter of 2018, but growth rebounded quickly. In both cases, consumer confidence dipped temporarily.
The economic impact of a shutdown would depend on its size (likely to be large this time) and duration (which we obviously don’t know yet). But keep in mind the current state of the US economy. So far it has held up surprisingly well despite rising interest rates, but it could get tripped up on any one of the growing number of challenges it faces. The cumulative effect of interest rate hikes, the rising cost of living, tighter credit conditions, the resumption of student loan payments and auto worker strikes could all hurt growth. A protracted shutdown would be one more obstacle in its path.
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