Only 13 days left! Will this fall’s U.S. government shutdown be the most costly in history?

Spreadex Ltd



The cost of the most expensive U.S. government shutdown in history is about $3 billion, and now, many people in the industry are worried that this number may be rewritten this fall.

The Congressional Budget Office (CBO) calculated that the U.S. economy permanently lost $3 billion during the 2019 shutdown. Now, as another shutdown looks increasingly likely to arrive in just 13 days (at midnight on September 30), the risk that this one will be more costly is growing.

As the two parties in the United States are still deeply divided, including Republicans in the House of Representatives who are said to be making a lot of noise in closed-door meetings, coupled with the new threat posed by the "eye-catching" international credit rating agencies, the upcoming The shutdown could plunge the U.S. government into uncharted fiscal territory, especially if it is prolonged...

It is foreseeable that the cost to the government and the U.S. economy will increase as the shutdown lengthens day by day. Although most of the withheld funds will be reissued or spent when the government reopens, research shows that , billions of dollars in permanent losses will still be inevitable.

Casey Burgat, a professor of political management at George Washington University, pointed out that this is a major event that can affect people's lives, but its seriousness still seems to be unable to avoid slipping to the unfortunate side. People just regret it afterwards and say, ‘Oh my god, that was stupid’.

Hot discussion in the industry: How long will this government shutdown crisis last?

How long will the coming shutdown last? Goldman Sachs said in a recent report that its baseline forecast was two to three weeks, and consulting firm Strategas Securities also believed that "around two weeks" was likely.

These estimates are enough to make this government shutdown one of the longest in history.

Even so, some industry insiders still believe that the above estimated time is too conservative. Mark Zandi, chief economist at Moody's Analytics, made a bold guess that the entire fourth quarter will be shut down. This would break the previous historical record of 35 days and could ultimately reduce U.S. GDP growth by 1.2 percentage points in the fourth quarter.

Meanwhile, many conservative Republicans have tried to downplay the impact of the shutdown. Rep. Andy Biggs, R-Ariz., described the shutdown simply as "a temporary pause in nonessential spending to get our fiscal position back on track."

Rep. Bob Good, Republican of Virginia, said, “We shouldn’t worry about a government shutdown.”

As they pointed out, during the government shutdown, some parts of the U.S. federal government will continue to operate normally. Programs such as Social Security and Medicare are not affected.

But even so, other programs that rely on annual appropriations will still experience significant impacts. These agencies must develop contingency plans before the shutdown, which will also force hundreds of thousands of federal employees to temporarily lay off their jobs and go home without receiving any pay until the government reopens.

Prior to this, the longest shutdown in U.S. history occurred during the Trump administration - lasting from December 22, 2018 to January 25, 2019. The core of it was Trump, the then U.S. President. A dispute with members of Congress over border wall funding.

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The CBO estimated that the partial shutdown at that time delayed $18 billion in federal spending and reduced gross domestic product by $8 billion in the first quarter of 2019. Most of the shortfall was made up as the government reopened, but permanent losses still totaled $3 billion due to furloughs of federal workers, delays in federal spending and reduced overall demand.

The authors of the CBO report noted that "this number does not include other, more indirect negative impacts of the government shutdown, which are more difficult to quantify and are likely to become increasingly severe as the shutdown continues."

In fact, these costs were incurred even though the shutdown was considered a "partial" shutdown, because Congress successfully passed five of the 12 appropriations bills that year. This year, the U.S. Congress has not yet reached an agreement on any funding area, which increases the possibility of a complete shutdown, and the cost of this shutdown will be higher.

New risks this year: U.S. sovereign credit rating faces another test

In addition to direct economic costs, many observers are currently focusing on new threats from the credit rating field.

In August this year, Fitch Ratings just downgraded the U.S. government's AAA sovereign credit rating, citing government dysfunction as the main reason for the downgrade. This move makes Fitch the second major international rating agency to downgrade the United States after S&P in 2011.

Currently, Moody's is the last authoritative rating agency to give the United States the highest 3A rating, but Jeannette Lowe, managing director of policy research at Strategas Securities, said that this lone seedling may also be at risk now.

"One area where we are currently paying attention to the shutdown is whether Moody's will put the United States on a credit rating watch list during the shutdown. In our view, such a move would be a significant event for financial markets," Lowe pointed out.

Greg Valliere, chief U.S. policy strategist at AGF Investments, said that even if the downgrade does not happen, Fitch and other institutions worried about U.S. dysfunction will "provide more ammunition for this topic in the coming weeks."

At present, judging from the "warlike remarks" made by some Republicans in the past week, the possibility of a long-term confrontation between the donkey and elephant parties seems to be increasing. Even though House Speaker McCarthy announced the launch of an impeachment inquiry against Biden last Tuesday amid pressure from radical Republicans, it did not appear to have eased the pressure on the shutdown.

Gordon Gray, director of fiscal policy at the American Action Forum, said that more and more people expect this to be a long process, and all the elements for a long-term tug of war are now in place. Rarely does the U.S. fiscal situation improve when a shutdown ends.

He said sadly, "This (government shutdown) is very costly, and what can we gain? The past several shutdowns have not brought new vitality to the United States of America."