US Braces for Possible Government Shutdown Amid Budget Standoff

Escalating Budgetary Standoff in the U.S.

The persisting budget deadlock in the United States shows no sign of resolution anytime soon, suggesting an increased likelihood of a government shutdown, the first since 2019. This comes as a consequence of hardline Republicans’ continuous refusal to accede to a provisional spending bill. Without a resolution by October 1, when the existing federal operations funding concludes, a multitude of federal employees may face unpaid furloughs in the absence of a congressional spending agreement.

Divisions Among Republicans

Kevin McCarthy, the Speaker of the House of Representatives, is predicted to advocate an aggressive agenda in the coming week. He plans to push for the ratification of four substantial bills that encompass both military and homeland security funding. This strategy is intended to persuade far-right Republicans to back a stopgap spending bill, or a continuing resolution. Yet, hardline Republicans are demanding for drastic cuts in spending, calling for approximately “$120 billion extra cuts for the new fiscal year alone.” These demands are a departure from the agreement that had previously been settled on.

President Joe Biden countered, stating the June deal would have reduced the budget deficit by $1 trillion over the coming decade. Biden took issue with a small group of extreme Republicans, who he said are refusing to uphold the agreed deal. Tony Gonzalez, a Republican Representative, also expressed criticism for McCarthy’s interim proposal, stating it does not present a viable solution.

Expected Wider Impact of the Shutdown

The majority of experts are of the belief that any potential government shutdown will be short-lived and its broader impact largely restricted. A study by Morgan Stanley reveals that the previous 20 government shutdowns since 1976 had a marginal effect on the economy. In relation to bond prices, shutdowns might induce temporary instability, but this is not a certainty.

Analysts like Brian Levitt from Invesco and Justin Purohit from SA expect the spending bills to be approved without complications. They agree that previous shutdowns were typically brief and had a minimal impact on the economy. Purohit expects a last-minute deal, albeit a messy process. “Though contentious, past standoffs have always proved temporary, with little lasting impact on U.S. equity markets,” he summarises. The scenario of an eventual resolution of the standoff is also supported by the results of the WSB survey.