Government Shutdown Risk Looms As Election Nears

The deadline for a potential government shutdown is September 30. Though many essential parts of government continue to operate through a shutdown, the impact on the economy and financial markets of any shutdown can be disruptive. In recent history, government shutdowns are often averted through last minute measures. When shutdowns have occurred, they have often lasted a week of less.

Government Shutdown Chances

Forecasting site Kalshi currently projects a 20% chance that the government is shutdown in 2024. The chance of a shutdown has risen in recent days, but still this signals that a shutdown is currently unlikely to occur.

The Impact Of A Government Shutdown

A government shutdown excludes many government activities because essential tasks continue. The impact to most government employees is also mitigated, that’s because they receive back pay after any shutdown ends. However, even delayed paychecks can be disruptive.

Medicare, Medicaid, Social Security and the U.S. Postal Service can generally continue during a government shutdown. However, other areas of government can be paused or disrupted, such as food assistance programs (SNAP), Federal housing support and access to, and maintenance of, National Parks.

Shutdowns can also lead to staffing issues at airports, causing longer lines for security screening. The pharmaceutical and defense industries can also see disruption during a shutdown given the role of government for licensing and funding in these sectors of the economy. However, active military is classed as essential and generally not disrupted by a shutdown.

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A shutdown can also pause economic reporting and statistical releases from the government. The government itself has some discretion during a shutdown in determining exactly what activities are deemed essential and not.

Market Impact

Historically government shutdowns, where they have occurred, often have been so brief as to avoid major economic impact, though at the time, the uncertainty around them has still proved considerable. Over time, laws have been passed to mitigate shutdown impacts. For example back pay for federal employees is now a legal requirement.

The Political Picture

The Republican-controlled House has so far failed to pass a funding bill. This is necessary by the end of September to avert any shutdown. This reflects, in part, the Republicans slim House majority, meaning just a few law-makers can successfully block proposed legislation.

As with prior shutdowns, bipartisan action may prove more successful in averting any government closure. The Senate now plans to move a stopgap funding bill according to the Hill. However, action by the House will still be needed to keep the government running in October.

Nonetheless, such a measure might likely only fund the government for 3 months, setting up a broader debate on government funding levels and priorities by the end of 2024.

Some of this is a reflection of a gridlocked political process with the Republicans controlling the House with a very slim majority and the Democrats controlling the Senate. As such, the outcome of November’s elections may reduce the risk of future government shutdowns and budget uncertainty, if a single party were to win a meaningful majority across the House, Senate and carry the Presidency.