Wednesday
May 29, 2024

US Shutdown: America’s Financial Mess

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By: Kashif Anwar, Research Analyst, GSDN

USA: source Internet

Introduction

As shutdown is bad news for a nation which happens in the case and sometime argues its being done willingly which raised an issue why such shutdown happens in the US not elsewhere? It happens due to a compromise agreed upon by nation’s founder with different branches of the government controlled by different parties. Today, such an act has an opposite effect, as the current US shutdown was a result of a small group of policymakers, hardline conservative Republican members who demanded deep spending cuts, a move which members of Republican and Democrats didn’t support.

What is US Shutdown

In the United States, shutdown occurs when funding legislation requires to finance the federal government is not enacted prior to October 1st to the beginning of the next fiscal year. Under the Anti-Deficiency Act which was passed in 1884, the federal agencies should spend and enact all 12 annual appropriation bills to run the government activities and bureaucracy. However,  later in two centuries later in 1980, Attorney General Benjamin Civiletti’s issuing a legal opinion making it a compulsion to have such a clearance began the first shutdown. As such a clearance to fund all government annual programs and activities is required before October 1st and policy makers inability to have a deal on it before the said date has resulted in 14 US shutdowns.

The 2018-19 shutdown lasted 34 days. Such a situation disrupts the government services and programs, reduces revenue, results in loss to the economy and impacts economic growth as the fourth quarter of 2013 GDP was reduced by 0.6%. The growing number of such shutdowns has cost the US economy billions of dollars and in the last decade more than 50 days of US shutdown has lost 56,000 years of work productivity. As shutdowns continues to happen, it has become a costly affair for the government, apart from being a political issue, has started impacting the axpayer and American money.

Why it’s a financial mess

As US shutdown affects every corner of the US federal government forcing around 800,000 workers to work without paycheque, furloughed, causing ripple effect which over the years have increased causing economic and financial mess in the US. Although, such a development impacts US credit rating, on the other hand, it highlights growing political polarisation which has weakened fiscal policymaking, putting pressure on US government debt which has increased to US$ 32.91 trillion in 2023. With shutdown becoming a regular phenomenon, how it will impact the US economy and financial situation is measured by its longevity and will it put the US into an economic recession or not is being discussed. As a shutdown impacts the US financial stability and US President re-election, it could also impact the US President Biden re-election in 2024.

Is another long US Shutdown in the making

While the US economic growth continues to be strong in 2023, the strongest amongst the G7 members, USA witnessing low unemployment rates and robust labour market has so far fully recovered from the GDP loss it suffered in 2021 due to the pandemic. In such a situation, the longevity of US shutdown is being watched carefully as a window of opportunity of signing the deal has gone to ensure the government funds run smoothly. Thus, it’s a delicate situation for the US economy and economic growth with global oil per barrel price inching closer to US$ 100. It could inflate ongoing inflation issue in the US moving the economy closer to the rumoured like recession.

However, such a situation is still far from becoming an economic threat in the US, it all depends upon longevity of the shutdown which has started to create a political chaos. Goldman Sachs argues such shutdown will reduce GDP by 0.2% every week, and considering ongoing development in the US like Federal Reserve going for a long fight against inflation, government is moving closer towards a messy US shutdown. With inflation weary American coupled with a long government shut down, oil prices going up and low business and consumer confidence could cause a major damage to the US economy. With ongoing United Auto Workers strike, oil prices, higher long term rates and the Biden’s student loan plan, debt stand at US$ 1.77 trillion, combinedly will amplify the impact of such shutdown.

The 2018-19 shutdown was the longest in the US history which erased US$ 11 billion of which US$ 8 billion was recovered and remaining US$ 3 billion was permanently drained as stated by the Congressional Budget Office. Considering such an impact of shutdown and about 900 programs being funded through the annual appropriation bill in the US, such a shutdown will not impact mandatory programs intent for Medicare, Social Security and Children’s Health Insurance Program. Every year, before a shutdown happens, a temporary continuing resolution comes into action to ensure all programs and government activities run smoothly before a deal among policy makers are achieved. With such safety net in place the elongation of the 2023-24 shutdown will increase economic and financial hardship in the US.

Conclusion

As the US shutdown keeps US critical infrastructure vulnerable, its prolongation will disrupt food aid, air travel and various government-run programs and activities which will contribute to a systemic stress to the US financial markets. Combined with other problems the US economy is currently facing, it will cause a significant impact on the US economy. However, the US Congress has managed to have a deal to avoid shutdown for the next 45 days and policy makers will go back to the bargaining table again once relief period is over. Learning from the past shutdowns despite recovery was made the loss (economic and human) incur will only pile up to become another major issue in the next US shutdown, a vicious cycle which has to end.

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