Research US: Government shutdowns are usually short-lived

Key takeaways

We expect Congress to pass a short-term funding bill (not a full budget) without a resuspension of the debt limit ahead of the Thursday deadline, which will avoid a government shutdown. However, as learned by experience, we should definitely not be surprised if the government shut downs for some time. They are, however, usually very short and hence do not derail the economy.

Congress has more time to re-suspend or increase the debt limit (and avoid a default), as extraordinary measures are not exhausted until mid-October at the earliest (the socalled X date). As no one is interested in a default, we expect a solution in one way or another ahead of the X date (either with Republican support or using reconciliation).

The financial and economic impact from not re-suspending or increasing the debt limit in time is much more severe than a government shutdown.

The political situation: Disagreements both between and within parties

The debt limit suspension expired on 1 August and the government will shut down on Friday if Congress does not pass a new budget financing discretionary spending. The two things are not necessarily related (see box on page 5 for definitions and differences). On Tuesday, the Republican Party blocked a Democratic bill that would both fund the government and re-suspend the debt ceiling. The Republican Party has said it would pass a short-term funding bill without a re-suspension of the debt limit, so it is still possible to avoid a government shutdown before Thursday. What complicates things are that the Democrats cannot agree internally on the USD3,500bn welfare package. 

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