Update On The US Shutdown

Update On The US Shutdown

By BT Chief Economist Chris Caton

 

The US government shutdown has entered its second week. This is not as dire as it sounds. First, only the 36% of Federal spending classified as “discretionary” is affected; Social Security payments, for example, continue to be made. Second, while there hasn’t been a shutdown since the halcyon days of Bill Clinton in 1996, before that they were quite a common occurrence.

The table below shows that there were 17 such shutdowns between 1976 and 1996. The median length was 3 days, with the longest being the 1995-96 event (21 days). Those that began on 30 September, as this one did, had a median length of 11 days. In each case, life as we know it eventually resumed.

The current shutdown came about because US Congress did not pass a “continuing resolution” to enable the Government to continue to spend when the new fiscal year began on 1 October, 2013. The main reason why Congress failed to do this is because the lunatic fringe of the Republican Party (frequently referred to as the Tea Party) is seeking to stop the Affordable Care Act (aka Obamacare), which makes health insurance compulsory for most  Americans, while ensuring that everyone can get coverage.

The economic effects of the shutdown are not huge; it is estimated that every week that it lasts will shave about 0.1 percentage point of Q4 GDP growth.

It now appears that the length of this shutdown will exceed the 11 days historical median. The reason is that the issue is about to be enjoined with another far more serious one; the raising of the US debt ceiling. This is something that needs to be done periodically so long as the Federal Budget is in deficit. Some will recall the share market chaos, and the downgrading of US Government debt by at least one ratings agency when the ceiling had to be raised in August 2011.

Raising the debt ceiling should be a simple accounting exercise; instead it tends to become a game of fiscal chicken between the Republicans and the Democrats. Given the intransigence that caused the shutdown, many fear that the debt ceiling negotiations will stall and the Government will literally run out of money, sometime soon after 17 October. A subsequent debt default by the US government would have untold negative consequences in global financial markets. The US Treasury has suggested that it would lead to a crisis as bad as 2008, and that the effects would be felt for a generation. 

The fact that the outcome of a default would be so pernicious is, of course, the biggest single reason why things are unlikely to get that far. But someone has to blink.

For as long as this remains an issue, markets will be volatile. But resolution should lead to a strong pickup as uncertainty is removed.

 

Disclaimers: Information current as at 8 October 2013. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. The information provided is opinion on general economic conditions only and does not constitute financial product advice.  Before acting on it, you should seek independent financial and tax advice about its appropriateness to your objectives, financial situation and needs. These economic updates are predictive. Whilst we have used every effort to ensure that the assumptions on which the economic updates are based are reasonable, the economic updates may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these economic updates. Past performance is not a reliable indicator of future performance.