Economy
Mint Explainer: US government shutdowns – cause and effect
Summary
- Persistent political gridlocks and intensified party discord have kindled anxieties over America's capacity to address significant fiscal challenges, notably its escalating debt
The US narrowly avoided a government shutdown last week following intense debates between the Democrats and Republicans over budget allocations. This confrontation follows a previous conflict concerning government expenditure, which earlier in the year had risked plunging the nation into a debt crisis.
Mint looks at this latest saga and the consequences thereof.
What a government shutdown entails
Per the Antideficiency Act, US government entities cannot allocate funds without Congressional approval. David Wessel from the Brookings Institution has said, "When Congress fails to enact the 12 annual appropriation bills, federal agencies must cease all non-essential functions until Congress acts. This is known as a government shutdown. If Congress enacts some but not all of the 12 appropriations bills, only agencies without appropriations have to shut down; this is known as a partial shutdown."
Shutdowns result in numerous federal employees stopping work, albeit essential services remain operational. This leads to payment disruptions for these employees and potential delays in regular government services.
What was the latest shutdown scare about?
Throughout 2023, Democrats and Republicans have repeatedly clashed over budgetary matters. A consensus in June saw an increase in the US debt ceiling, balanced with limitations on government spending growth. Nevertheless, some hardliner Republicans expressed discontent with the accord. During discussions on appropriations for the ensuing fiscal period, they called for budgetary cutbacks and diminished support for Ukraine. Subsequent negotiations culminated in a provisional bill, sustaining government funding until mid-November. Despite the temporary solution, challenging negotiations loom.
Why are shutdowns recurring?
Contrary to many constitutional democracies, the US has a history of facing such shutdowns. A previous shutdown unfolded in 2018-19 during the Trump administration, with the contentious issue being his border wall proposition. The Obama era also saw a shutdown related to healthcare proposals. While other democracies may persevere with expenditures amid governmental stalemates, the US mandates legislative endorsement. Ironically, a system designed to promote agreement now seems captive to heightened political divisions.
What are the implications for India?
Frequent US shutdown threats could destabilize global markets, including India's.
Past shutdowns during the Trump and Obama tenures have revolved around specific issues. Yet, persistent political gridlocks and intensified party discord have kindled anxieties over America's capacity to address significant fiscal challenges, notably its escalating debt.
The recent shutdown concern, coming close on the heels of the debt ceiling crisis in June, has possibly magnified these apprehensions. Moody’s analyst William Foster told Reuters that continuous failure to tackle these issues might precipitate a US credit rating downgrade. Leading agencies like Fitch and S&P have already downgraded the US rating, while Moody's has maintained its AAA rating, its pinnacle score.
