Lawmakers are returning to Washington this week and investors are concerned about a possible government shutdown this fall. The fate of government spending and its impact on the economy will depend on a new round of budget fighting as Congress members return from their August recess. The first deadline approaching is the end of the fiscal year on September 30th, after which many government services may cease unless action is taken to delay it. Senate Majority Leader Chuck Schumer emphasized the need to “keep the government open” as the Senate reconvened on Tuesday.
While past government shutdowns have had minimal economic impact, some experts warn that this time could be different. Moody’s Analytics chief economist Mark Zandi raised the possibility of a long-term shutdown that could extend into next year, which could pose a threat to the economy. Goldman Sachs also mentioned the possibility of an extended shutdown while predicting a modest effect on the economy.
Stifel chief Washington policy strategist Brian Gardner takes a more optimistic view, stating that a shutdown would be a delay rather than a major shift in the economy’s trajectory. Goldman Sachs analysts estimate that a government-wide shutdown would reduce economic growth by 0.15 percentage points per week, but growth would rebound in the quarter following reopening.
Another concern is the impact on bond ratings, especially after Fitch downgraded the US credit rating last month. The recent downgrade cited a deterioration in governance standards over the past two decades as a reason for the downgrade. The upcoming budget fight is likely to highlight Washington’s dysfunctional process of dealing with fiscal issues, even if a shutdown is avoided.
In terms of legislative agenda, Senators aim to pass their version of the necessary government spending bills by next week. Senate Republican Leader Mitch McConnell supports Senate Majority Leader Schumer’s plan and prioritizes securing funding for national security and disaster relief. However, House Republicans may have different priorities and face pressure to attach unrelated issues to any funding deal. Rep. Marjorie Taylor Greene has already stated that she would oppose a funding deal unless it includes an impeachment inquiry against President Biden.
In addition to the immediate concerns, there is a more consequential deadline coming up on January 1, 2024. If there are no long-term government spending bills in place by then, government spending will be cut by 1% across various programs. These cuts could have a significant impact on the economy from the Pentagon to the Department of Education. Senate Majority Leader Schumer emphasizes the importance of keeping the government open and avoiding a shutdown that would hurt every American.