Why looming US Government shutdown is unlikely.
When the fiscal year ends on September 30, the US Congress needs to approve 12 bills that fund the government or a temporary measure that extends the current funding. Otherwise, the government will run out of money and have to stop some or all of its non-essential operations. This is called a government shutdown, and it can happen if Congress and the president disagree on the budget or if the president rejects the funding bills. A government shutdown can affect many aspects of the society, such as the economy, public services, federal workers, and national security.
Investors are reacting to a possible government shutdown with a mix of caution and optimism, as it anticipates a temporary and limited impact on the economy and markets. However, investors are also closely watching the developments and negotiations in Congress and the White House, as any prolonged or unexpected outcome could change the sentiment and outlook.
Background to the on-going deterioration in fiscal discipline
Over the past decade (2010 to 2021), the US federal deficit has increased by ~$9 trillion[1], reaching a record high of $3.1 trillion in 2020. The ratio of debt (deficit)-to-GDP also rose from 8.7% in 2010 to 14.9% in 2020, indicating that the government’s borrowing and spending outpaced the growth of the economy. The main factors that contributed to the rising deficits were the 2017 tax cuts, the increased spending on defence, health, and social programs, and the emergency relief measures for the COVID-19 pandemic[2].
Since 2020, deficit spending has continued unabated and according to the White House, the debt to GDP ratio is projected to be ~101.8% in 2023[3]. This means that the total public debt will be about $26 trillion, which is more than the nominal GDP of the country. The Congressional Budget Office (CBO) also estimates that the debt to GDP ratio will be ~101.8% in 2023, based on its baseline scenario[4]. The debt to GDP ratio is projected to increase to ~106.7% in 2024, acco