Government Shutdown in October Possible Given Budget Fights

Strategas Washington Policy Research

Despite the June debt ceiling deal, the House and Senate cannot agree on spending levels for fiscal 2024, and there is a growing possibility of a government shutdown on October 1. While government shutdowns have historically not had a major impact on GDP or equities, we are watching to see whether a shutdown this fall could lead to Moody’s putting the US on a credit ratings watch, which would be a major event.

Though a deal to avoid breaching the debt ceiling this year was ultimately agreed upon, it did little to alleviate broader fiscal concerns in the US. The June deal included caps on federal discretionary spending for FY24 and FY25. Congress has since been writing FY24 appropriations bills to fund the government past September 30, but at different levels. The House is looking to set FY24 appropriations at lower FY22 levels while the Senate is looking to provide more spending in FY24 than the debt ceiling deal allows. As a result, we are setting up for a budget fight when Congress returns from recess in September and there is an increasing likelihood that we will see a government shutdown on October 1.

In recent years, shutdowns have not really hurt economic growth or even stocks.

As our chart shows, the last six government shutdowns all occurred in quarters with positive GDP growth. However, on August 1, Fitch downgraded US debt—12 years after another rating agency, S&P, did the same following the 2011 debt ceiling fight. If Moody’s, the third and final major rating agency, were to put the US on credit watch because of a government shutdown, that would be a significant event and one to follow closely.

A shutdown could lead to higher spending.

If a government shutdown occurs, legislation will be needed to reopen the government and set appropriations levels. Ironically, a shutdown over government spending could lead to higher spending levels because legislation to reopen the government is likely to be biased towards the current Senate proposals to provide for more government spending. This outcome has made some members of Congress wary, which could actually prevent a shutdown. There is increasing talk of the need for a continuing budget resolution to buy time for further negotiations. A continuing budget resolution would extend current (FY23) spending levels for a set period (e.g., 30 days, 90 days). In that scenario, we would look for Congress to pass a larger piece of legislation towards the end of the year (likely December) that would include the FY24 budget, but also various other policy provisions.

Regardless of how this plays out, fiscal concerns will continue to play a prominent role in US politics.

The US is experiencing significant costs to service federal debt due to high interest rates, higher federal spending on entitlements, and lower tax revenues, which is worsening the federal deficit. Action may not be taken until after the 2024 presidential election, but the US is likely entering a period of austerity as it needs to get its fiscal house in order.

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