Markets are watching as twin deadlines for a government shutdown are approaching on March 1 and March 8. The first deadline impacts four of twelve appropriations areas for the U.S. government, the second the remaining eight.
However, it’s possible that budgets pass in the coming days that avert a shutdown. If not, another continuing resolution, as has avoided previous potential shutdowns, appears likely. Continuing resolutions give lawmakers more time to pass a new budget by essentially rolling forward prior funding measures.
The Chance Of A Government Shutdown
Currently event forecasting site Kalshi, gives an approximately 20% chance of a shutdown by March 4, and estimates that any shutdown before July might last only days. As such, expectations are that a shutdown will likely be avoided and were a shutdown to occur, it would be brief.
The Fiscal Responsibility Act
However, if no government budget is passed before April, then the Fiscal Responsibility Act may come into effect that could have considerable impact on government spending. That would likely impact economic growth and the trajectory of government debt.
Without an agreed budget, the Fiscal Responsibility Act as passed would substantially cut government funding. It would also include rescinding remaining government funds related to a range of measures related to COVID-19 and tightening work and training requirements to receive certain assistance programs, specifically the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF). These actions could cause a material reduction in government spending compared to Congressional Budget Office baseline estimates, based on the CBO’s May 2023 analysis.
Therefore, another continuing resolution without further progress on the underlying budget, may prompt a wave of automatic government spending cuts in April without further legislative action.
That said, there appears to be momentum in the overall budget process such that even if a budget is not passed before the upcoming March deadlines, it may still be passed before April.
The Economic Impact Of A Government Shutdown
Any government shutdown would likely be a hit to U.S. economic growth. Government employees would see delayed paychecks during any shutdown. Plus government functions deemed non-essential would be paused. That may impact both healthcare and defense sectors, since these are relatively more reliant on government partnership compared to other parts of the U.S. economy.
Key areas such as Social Security, Medicare and Medicare would not be impacted, but the economic impact impact of any government shutdown lasting more than a few days could prove significant. Still, as demonstrated by previous continuing resolutions in recent months, there does appear to be a bipartisan consensus to avoid a shutdown in Congress, even if it typically comes into place at the last minute.
The Market Impact
Once again, it appears likely that although coming down to the wire, a government shutdown will be avoided, or be sufficiently brief as to have a minor economic impact.
However, despite recent progress if a continuing resolution is passed and the government budget process drags into April then the Fiscal Responsibility Act could bring material government spending cuts. That may be a positive for those who view U.S. government debt as on a potentially unsustainable trajectory. However, such a sharp reduction in funding could also have an impact on economic growth. It’s also possible that full budgets are passed during the coming weeks bringing continuing resolutions and shutdown risks to an end for this budget cycle.