Updated (November 16 and 17, 2023): This piece has added information to reflect the budget votes in both chambers of Congress and the White House signing the bill.
Congress has passed a continuing resolution (H.R. 6363) to avert a government shutdown before the November 17 deadline.
The continuing resolution avoids any government shutdown risk for 2023. However, the markets now have two potential shutdown deadlines for the markets to pay attention to in January and February 2024. This approach is unusual because previous continuing resolutions would fund the government in its entirety until the resolution expired.
A Two-Tiered Approach
The continuing resolution gives separate extension deadlines for different areas of government. Four appropriations committees have a deadline extension until midnight January 19, 2024. These are:
- Agriculture, Rural Development and the Food and Drug Administration
- Energy and Water Development
- Military Construction and Veterans Affairs
- Transportation, Housing and Urban Development
Then the remaining eight areas of government would have their funding expire two weeks later on February 2, 2024. These are:
- Commerce, Justice and Science
- Financial Services and General Government
- Homeland Security
- Interior, Environment and Related Agencies
- Labor, Health and Human Services and Education
- The Legislative Branch
- State and Foreign Operations
There are several weeks for politicians to make progress on the budget. The 45-day period after September’s continuing resolution was disrupted by the need to elect a new House speaker, a process which consumed several weeks.
The hope is Congress can agree on a full budget can be agreed on that avoids the need for continuing resolutions, since these come with shorter term deadlines and the risk of a government shutdown. Various budgets have passed the House and Senate independently to date, but there has been no reconciliation between the two chambers.
The Market Impact
A government shutdown would likely be a material drag on economic growth due to delayed pay for many employees as well as disruption and delay to routine government activities. As such, the market impact would almost certainly be negative.
Risks To Growth
This comes at a time when the trajectory of the U.S. economy is uncertain. Nowcasts of Q4 economic growth suggest the economy is performing relatively well. However, as we enter 2024, medium-term economic forecasts highlight economic risks, especially at a time when the Federal Reserve is holding interest rates at restrictive levels. As such, a protracted government shutdown could put the U.S. economy at risk of stalling.
Now there will be two deadlines to monitor. Arguably the shutdown risk may be slightly greater as lawmakers who are unwilling to create a broader government shutdown could be willing to halt funding to four of twelve appropriations areas on January 19.
However, continuing resolutions have passed the House in September and now November 2023 with bipartisan support. So perhaps that can happen again in January and February 2024 should a broader budget not be passed by those deadlines.
Rising Interest On Government Debt
The second issue, though, is the size of the overall budget — especially for government debt markets. This fiscal year, the cost of interest on the national debt is estimated to hit more than $800 billion, according to Axios. That’s larger than the cost of most government departments. In fact, expenditure on interest on government debt is estimated to exceed the total budgets for both the agriculture and education departments’ combined budget and is almost half the U.S. defense budget according to government Congressional Justification data.
The immediate issue is getting a budget passed and eliminating the risk of a government shutdown. However, the medium-term issue is management of government debt on a sustainable basis. U.S. debt to gross domestic product stands at almost 120%, according to the Office of Management and Budget. That’s high relative to history and many other developed countries. The size of the debt hadn’t been an immediate problem recently as interest rates were so low, but now that has changed.
Interest expenditure as a percentage of GDP remains at lower levels than in the 1990s. Still, with rising interest costs it may approach peak levels as well.
With November’s continuing resolution signed by Biden, the next deadlines for avoiding a shutdown will come in early 2024. However, setting the U.S. government’s borrowing on a more sustainable course is another issue that the markets, and especially the government debt markets, may start to pay attention to.