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The US government is closing in on a September 30 deadline to pass new bills crucial to funding its operations. Its new fiscal year begins on October 1, but the House of Representatives has only passed one of the twelve appropriations bills needed to fund the federal government through that period. Four further fiscal appropriations have been prepared for debate and an eventual vote, but there is no certainty that these proposals will pass the House. If funding or the government is not agreed upon by the end of the month and lapses, it is referred to as a government shutdown.
The various conditions of government shutdowns result in different magnitudes of ramifications, but the most palpable impact of a shutdown will usually be furloughs of public employees or suspension of pay. During full shutdown scenarios in 2013 and 2018 (lasting 16 days and 3 days, respectively), the Committee for a Responsible Federal Budget (CRFB) notes that approximately 850,000 out of 2.1 million non-postal federal employees were furloughed. With only one appropriation currently passed and time running short, a full shutdown scenario is increasingly likely. However, in 1990’s 3-day partial shutdown, only about 2,800 federal employees were furloughed. Damage was minimized in that case by the shutdown occurring over the weekend, which could potentially be the case this time around as October 1 occurs on a Saturday.
Though agreement on all appropriations by the deadline is unlikely, the federal government could still buy some extra time to avert a shutdown. Late last night, Bloomberg reported that Senate Republicans and Democrats were nearing agreement on a short-term bipartisan spending measure to extend government funding for four to six weeks from October 1. Similar bills, commonly called “continuing resolutions” (CR), have managed to offset government shutdowns before; particularly in 2018 when two separate government shutdowns were delayed into January and December, respectively. This shows that, even if a CR is passed, there is no guarantee that a shutdown will ultimately be averted. Moreover, the chances of the House agreeing to whatever conditions the Senate lays out in its short-term stopgap are unknown.
The realization of a shutdown would likely ripple through sovereign debt markets. With the US government having already suffered a downgrade of its credit rating earlier this year, Moody’s notes that a shutdown would present further negative prospects for the quality of US sovereign debt. In a statement on Monday, the ratings agency noted that a shutdown would “underscore the weakness of US institutional and governance strength relative to other AAA-rated sovereigns” by exposing “the significant constraints that intensifying political polarisation put on fiscal policymaking at a time of declining fiscal strength.” Those are harsh words and strikingly similar to the rationale utilized by Fitch earlier this year to justify cutting the US’s credit rating to AA+. Moody’s is the only remaining ratings agency out of the big three (Moody’s, Fitch, and S&P) that has yet to downgrade US sovereign debt from the ranks of its pristine AAA rating.
As MRP noted at the time, Fitch’s downgrade was summarily dismissed by many US government officials. Without addressing serious concerns raised by Fitch regarding “expected fiscal deterioration over the next three years” and “repeated debt-limit political standoffs”, Treasury Secretary Janet Yellen called the decision “entirely unwarranted”. However, bond markets clearly reacted to the change in rating, igniting the latest leg of an steep and ongoing climb in long-term rates. Following the publication of Fitch’s report on August 1, the yield on the US 10-year Treasury bond had jumped out to 4.2% by August 3, a near nine-month high at the time. To compensate for greater risk associated with holding US debt, rates had to go higher. That risk has compounded pressure from rising short-term rates at the Federal Reserve, which have pushed the size of the US’s annual expenditure on interest related to its sovereign debt up to a record $970 billion. That figure has risen by an unprecedented 50% YoY.
Depite her nonchalant reaction to Fitch’s downgrade, it was less than four months ago that Yellen was counting down the hours until the supposed “x-date”, on which the US federal government would run out of cash and potentially be forced into default until the debt ceiling, already worth $31.4 trillion, was raised or new tax revenue could be brought in. Ultimately, a deal was struck by Congress and the President to suspend the limit on the amount of debt the government can issue for a period of two years, but with the x-date just days away and the Treasury having to employ “extraordinary measures” in accounting practices to avoid default. In the past, raising the debt ceiling faced little opposition, with extensions on this limit having been increased nearly 80 times between 1960 and 2022 – an average of more than once per year. The frequency in which this event occurs could be concerning on its own but, as MRP noted in August, widening political divides in congress threaten further bitter battles over government spending.
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