It should come as no surprise that Republican infighting in the House of Representatives on Friday scuttled a stopgap measure intended to prevent a government shutdown on September 30.
That’s the deadline for passing new budget legislation to fund the U.S. government in the next fiscal year – which begins Sunday.
But with a faction of hard-line Republicans refusing to pass any kind of legislation without massively cutting available funding, the country now faces a possible shutdown of all federal functions deemed non-essential.
Even those deemed essential are not being paid in full, said Justin Begley, an economist at Moody’s Analytics, although they will receive their full salaries once the shutdown is over.
“We have reached this point because political partisanship appears to have increased,” Begley explained.
While the US Congress decides what is essential and what is not – the line is typically drawn at security – no government funding means no government spending.
This could leave hundreds of thousands of federal employees without pay and millions of citizens without access to programs such as food assistance.
Depending on the duration of the shutdown, the US economy as a whole could also deteriorate.
A two- to four-week shutdown is the most likely scenario, Begley said.
And while that would have some impact on the economy – economists are divided on how bad the situation could get – there are also concerns that the U.S. credit rating could suffer, leading to a rise in interest rates on government loans.
Last month, Fitch Ratings downgraded the U.S. credit rating by one notch due to the debt crisis and political divisions. Earlier this week, Moody’s warned that a shutdown would have a negative impact on the government’s creditworthiness: The rating agency currently gives the US the highest possible AAA rating.
The Republican Speaker of the US House of Representatives, Kevin McCarthy, is encountering resistance to the budget legislation from hardliners in his party [Jonathan Ernst/Reuters]
Loss to the economy
Around a quarter of US gross domestic product is government spending. If that spending were to be “significantly impacted,” Begley said it would have all sorts of knock-on effects on investment and consumption and impact on the economy as a whole.
According to Jared Bernstein, chairman of the White House Council of Economic Advisers, there could be a potential loss of 0.1 to 0.2 percentage points in quarterly economic growth for each week that the shutdown lasts.
Economists at Goldman Sachs, meanwhile, estimate that number at 0.2 percentage points for each week of the shutdown.
In the event of a four-week shutdown, Moody’s forecasts a 0.4 percentage point drop in GDP, but that number is not certain because there is a compounding effect that could drive that number higher, Begley said.
The worst case scenario is a complete quarterly shutdown. According to Moody’s estimates, this could result in a two percentage point decline in GDP growth.
“Lost hours, wages and productivity of federal government employees … will depress GDP,” Begley said.
While economists expect some recovery once back pay for government employees arrives, the roughly five million government contractors, about half of whom are expected to be affected by the shutdown, will experience permanent loss of work and wages.
A long shutdown also means fewer small business loans and fewer publicly traded companies. In fact, Gary Gensler, chairman of the US Securities and Exchange Commission, urged companies willing to go public to do so before the shutdown: If non-essential government services are frozen, the process of going public will be slow Examination of companies for IPO is slowing to a crawl.
All this on top of a second month of low consumer confidence in September.
Then there is another scenario. If the shutdown lasts the entire quarter and begins Jan. 1, the government will be forced to automatically cut discretionary spending by 1 percent, giving hard-line Republicans at least some of their wishes.
U.S. Rep. Andy Biggs of Arizona is among the far-right Republicans pushing for drastic spending cuts [Jonathan Ernst/Reuters]
What possible scenarios are there for the future?
The options for avoiding a shutdown are currently dwindling.
Each year, Congress must pass 12 budget bills to keep the government running—but that process likely won’t be completed before time runs out.
Instead, Congress could instead push through a stopgap measure — a so-called “continuing resolution,” or CR — to temporarily fund the government while it continues work on the budget legislation.
But Republican hardliners have rejected the prospect of a short-term solution.
“CRs have only made the American economy worse,” one of those congressmen, Andy Biggs, wrote on social media.
While Friday’s stopgap measure failed in the House by a vote of 198-232, House Democrats are pinning their hopes on a separate bipartisan stopgap measure that could potentially come from the Senate.
However, it is unclear whether House Speaker Kevin McCarthy – the top Republican in the House – would introduce the Senate bill in the House.
Far-right Republicans have threatened to strip him of his speakership if he does so.
“It is becoming increasingly clear that Republicans will bear most of the blame for the shutdown, which could lower the partisan walls between McCarthy and his allies and Democrats in the House and Senate,” Begley said.
But it remains unclear whether Republican control will lead to effective action.
“The additional pressure means a shorter shutdown of two to three weeks is still possible, but increased intra-party tensions increase the risk that the shutdown will last slightly longer,” he added.