A potential federal government shutdown looms as current funding expires on Sept. 30. Without agreement on extending spending, federal agencies may halt operations until new legislation is passed and signed by President Joe Biden.
Currently, the main hurdle lies in the House, where Speaker Kevin McCarthy aims to unite conservatives and moderates behind a Senate and Biden-approved funding bill. He faces challenges, to say the least.
With this pending shutdown on the horizon in just a few days, let’s dive into what this means for investors and the general public.
Why Government Shutdowns Continue to Happen
Before we dive into the nitty gritty of why shutdowns are bad, it’s important to consider why they happen in the first place.
Government shutdowns materialize when spending bills lapse, and when there’s a deadlock between Congress and the president or different chambers of Congress. This is based on Article I of the Constitution, Section 9, stating that money can only be withdrawn from the Treasury through lawful appropriations.
The Antideficiency Act, originating from a law in 1870 with subsequent revisions, reinforces this principle. It allows for some essential federal activities to continue with certain flexibility.
According to the Congressional Research Service, there have been 20 shutdowns since 1976. However, their impact has evolved notably since 1980. Before 1980, agencies often operated during funding gaps, assuming a quick resolution. But in 1980 and 1981, Attorney General Benjamin Civiletti’s opinions mandated agency suspensions until funding resumed.
What Led Up to This Shutdown
Readers may remember that Speaker McCarthy averted a previous government shutdown, passing a spending debt ceiling bill in June that provided some concessions for his Republican counterparts but largely gave the Democrats everything they wanted. This bill averted disaster at the time. However, in order for specific government agencies to draw funds from the U.S. Treasury, appropriation bills must be passed, allowing for government agencies to draw on the U.S. Treasury for its expenses. Right now, both parties are deadlocked on their negotiations of specific appropriations bills, with the focus on proposed aid to Ukraine in its fight against Russia.
Notably, on Tuesday, Senate lawmakers from both sides of the aisle reached agreement on a stopgap spending plan, which would keep the government open for business through Nov. 17, and provide around $6 billion of aid for the Ukraine war and another $6 billion in disaster relief. While this sounds reasonable to many, hard right-wing House Republicans have reportedly threatened to oust McCarthy from his Speaker role if he put the bill on the floor.
The division between moderates and hardliners presents a challenge for Speaker Kevin McCarthy. Indeed, factions within the Republican Party continue to clash, and until there’s some sort of unified message, it’s going to be difficult to see the light at the end of the tunnel. This turmoil has led many experts to expect a shutdown on Oct. 1, barring something drastically changing.
The central concern revolves around next year’s government spending. Certain staunch Republicans favor reducing the top-line budget to approximately $1.4 trillion, below the $1.6 trillion previously agreed upon by Speaker McCarthy and President Biden. However, moderates lack motivation to further cut spending.
Democrats have rejected the notion of voting for a spending figure lower than the May agreement between McCarthy and Biden. Bobby Kogan, a senior director at the left-leaning Center for American Progress, suggested that the GOP’s aim seemed to be to pressure Democrats into making concessions on other issues to maintain the initial spending agreement.
Why Is a Shutdown Happening?
The Senate Appropriations Committee has bipartisanly passed all 12 standard appropriations bills, while the House, led by Speaker Kevin McCarthy, has not found a unanimous GOP solution. The House Republican majority, with a small group of conservatives pushing for deeper cuts than moderates support, has a five-seat advantage. McCarthy and Biden established spending caps earlier this year through legislation, but some conservatives aim to further reduce these caps.
McCarthy could likely pass legislation with bipartisan support, but it could jeopardize his speakership as conservative members could challenge his leadership at any moment. President Biden opposes significant federal cuts, and some Senate Republicans are skeptical of the House conservatives’ stance. Senate Minority Leader Mitch McConnell urged Republicans to find common ground, emphasizing that government shutdowns have historically been politically detrimental for the party.
Based on how the law is written, and the Republican party’s track record of using the debt ceiling and appropriations bills as leverage in their budget negotiations, we’re likely to continue to see government shutdowns on an ongoing basis. Unless some constitutional reform is put forward, this polarized political environment is almost certain to lead to more volatility in the economy and the markets resulting from these shutdowns.
There’s some interesting data on government shutdowns that suggest there’s much more harm than benefit resulting from each of these tantrums. Additionally, with the U.S. credit rating already downgraded, and at risk of another downgrade from Moody’s, there’s little to gain from these political stunts.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.