The government is likely to shut down on October 1, as Congress has failed to agree on some type of funding legislation for the 2024 federal fiscal year. Lawmakers are supposed to pass 12 different spending bills to fund agencies across the government, a laborious and very time-consuming process. If there is no resolution before October 1, the first day of the federal fiscal year, a full shutdown will occur, the first since 2013. Here are seven things to know about government shutdowns:
1) What is a government shutdown?
A government shutdown occurs when Congress fails to pass funding legislation for the upcoming federal fiscal year. Congress is required to pass 12 appropriation bills that need to be signed into law by the president to continue funding the government. If any of the 12 appropriation bills do not pass, then the government shuts down—effectively the federal government must stop all non-essential functions until funding is approved by Congress and signed into law.
2) What is a Continuing Resolution (CR)?
A CR temporarily funds the government in the absence of appropriation bills being passed, typically continuing funding levels from the year before. Historically, CRs were utilized to give lawmakers a short period of time to complete their appropriation bills while preventing the government from shutting down. Congress has used CRs to fund the government in recent years, with the entire 2011 fiscal year funded through multiple CRs.
3) How many times has the government shutdown before?
Since 1976, there have been 21 government shutdowns, with the most recent shutdown occurring in late 2018 and into early 2019. Historically, government shutdowns have lasted for a short amount of time, with only four “true” shutdowns where operations were affected for more than one business day. The last true shutdown was only a partial shutdown, as almost half of the 12 appropriations were previously enacted.
4) What services are affected by a shutdown?
Essential services—mainly those tied to public safety—continue to operate, with payments covering any obligations incurred only when appropriations are. Historically, border protection, in-hospital medical care, air traffic control, law enforcement, and power grid maintenance have continued to operate, as they are deemed “essential” services.
5) Does a government shutdown save money?
The answer is no, unfortunately. Did you know that federal workers are guaranteed back pay? So even though the workers are forced to be idle during a shutdown, they do get back pay when things reopen. And more importantly, a shutdown is far from money-saving, because there is a sizable cost to the economy as some businesses often forego hiring and investment decisions because those firms can’t get federal permits or access to federal business loans.
6) How does a government shutdown differ from a default?
In a government shutdown, the federal government temporarily stops paying workers who perform some type of government service. In contrast, a default occurs when the government exceeds the statutory debt limit and is unable to pay some of its creditors. Now, when a government is unable to pay its bills, markets get a lot more nervous. Don’t worry, we’re a very long way from that.
7) How do markets respond to government shutdowns?
Historically, markets were not materially impacted by a shutdown. For example, in 2013, the House and Senate were in a standoff over funding for the so-called Affordable Care Act, and the government was shut down for 16 days during the first part of October. The S&P 500 had some down days but overall, the equity market took all the political drama in stride with a 3.1% advance during those 16 days. In this case, we think there would be minimal damage: the U.S. postal service would be unaffected since it does not depend on Congress for funding; the Social Security Administration would keep issuing benefits and payments and Medicare and Medicaid would continue payments since many aspects of these programs are not subject to annual appropriations. If we had to highlight a downside risk, it would be if FEMA runs out of disaster relief should a major storm impact the country.
There you have seven things to know about government shutdowns. If we added one more thing to know to this list, it might be how these shutdowns ended historically. Though each case is different, it’s safe to say that voters expressing their dissatisfaction with politicians is a common theme. So, if you are affected, or even if you are not and are just dissatisfied with the dysfunction in Washington, contact your representative. More squeaky wheels could lead to quicker oil delivery.
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