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Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Another government shutdown looms

Congress has only a few specific constitutionally mandated responsibilities, one of which is to fund the government each fiscal year. When it fails to accomplish this duty, the Federal government lacks the funds to operate, an outcome that has occurred 20 times since 1976 and on 4 occasions resulted in a shutdown of certain government operations.

Barring something of a miracle, another storm is brewing when Uncle Sam’s spending authority ends on September 30. The usual wrangling between Democrats and Republicans is taking a back seat this cycle to an internecine battle within the House Republican caucus that is unlikely to be resolved during the 12 legislative days left before the deadline. Buckle up, it could be a bumpy ride.

Roughly 75% of government expenditures are on autopilot, including Medicare, Social Security, and interest on the national debt. The remaining one quarter, known as discretionary spending, must be authorized each year by Congress and includes salaries of government employees, national defense spending, and the operating budget of the US Government. This authorization of expenditures for the fiscal year is broken down into 12 individual pieces, each covering a different category of spending. The House and Senate adopt their own versions of the 12 appropriations bills and then resolve differences through a process called reconciliation. The final bills are sent to the President and once signed, allow the work of government to proceed.

This seemingly simple process almost never works as the law requires. In many cases Congress trashes the process and adopts what is called an omnibus spending bill that combines the 12 appropriations into one giant bundle. This happens about half of the time, including the current 2023 fiscal year.

When Congress fails to either pass the 12 appropriations or an omnibus bill, the last resort is a temporary emergency extension of current spending levels called a continuing resolution (CR) intended to punt until a broader spending deal can be reached. This has occurred 200 times since 1977. Impressive.

If no appropriations pass, and Congress fails to enact a CR, government agencies are legally prohibited from spending and many parts of the government cease operating until funding is restored. Beginning October 1, Americans are likely to get another civics lesson as many services they depend upon become unavailable.

While this degree of brinksmanship is hardly new, the current fight over spending priorities is playing out primarily within the Republican party and poses a threat not just to taxpayers who depend upon government services but also to the Speakership of Kevin McCarthy, who ceded much of his power to a relatively small group of extremists in his party during his 15-ballot battle for the top job last January.

McCarthy earned a major victory in May by cajoling his caucus into an agreement with the White House to raise the debt ceiling in exchange for a limit of $1.59 trillion in fiscal 2024 discretionary spending, which should have greased the skids for a relatively uneventful appropriations process. But a contingent of about 3 dozen members of the House Freedom Caucus are demanding that the Speaker renege on the deal and chop an additional $120 billion from non-defense spending. To further complicate matters, a handful of McCarthy’s most ardent antagonists are making additional demands that are dead on arrival in the Senate targeting the Pentagon’s social policies, Federal law enforcement, and aid to Ukraine, as well as commencement of an impeachment inquiry. These insurgents have leverage, given McCarthy’s slim majority in the House. He can only lose 4 votes to pass anything without Democratic support.

The Speaker also faces a more existential threat thanks to one of the deals he cut to attain the chair. Any single House member can call for a vote to “vacate”, triggering a new election for speaker, a move which several of the hard-liners are eager to pursue.

McCarthy and most of the Republican caucus want to pass a continuing resolution to temporarily fund the government until later this year, buying time to negotiate deeper spending cuts without resorting to a destructive shutdown. His opponents, having swallowed the compromise over the debt ceiling, are ready to rumble and willing to see much of government to grind to a halt.

Most Americans would feel the pinch of a prolonged shutdown. Mandatory spending like Social Security and Medicare would continue, but many employees at the Social Security Administration and HHS would be furloughed, delaying new applications and customer service requests. Non-essential Federal employees would be furloughed, and those deemed essential would work without pay until appropriations are finally passed and back pay is authorized. National Parks, FDA inspectors, the National Institutes for Health, passport processing, and hundreds of other important government services would be curtailed or limited until funding is restored.

According to the Constitution, Congress, the President, and Federal judges continue to receive paychecks in any event, shutdowns notwithstanding.

A shutdown would also cost tens of billions in lost economic output and invite higher interest rates as creditors’ faith in the US is further diminished. Last month, rating agency Fitch downgraded the US credit rating due to our continuing fiscal dysfunction highlighted by the May debt ceiling follies. America’s creditors have been surprisingly clement, but their patience is not limitless.

The House returns on Monday from its 6-week summer break to resume deliberations, but rhetoric has hardened during the hiatus making a protracted shutdown more likely. Hang on.

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