The continuing U.S. government shutdown highlights the periodic weakness in its budget policymaking, Fitch Ratings says. Shutdowns have not directly affected the country’s ‘AAA’/Stable sovereign rating but can signal that disputes on other issues are a constraint on fiscal policymaking.
The partial federal government shutdown that began Dec. 21 is now the longest since October 2013 (the longest shutdown lasted three weeks in 1995/1996). President Trump’s refusal to sign temporary spending bills that did not include USD5.6 billion for border wall funding and which included appropriations for other programs exceeding those in the president’s budget triggered the shutdown.
When and how the government will reopen remains unclear. The advent of a new Congress on Thursday saw a similar spending package passed by the House of Representatives, where the Democrats now have a majority. The package did not include additional wall funding, is opposed by the Trump administration and will not be taken up by the Senate. Some Republican senators have advocated passing a continuing resolution to reopen the government.
U.S. fiscal policymaking coherence can be weak relative to peers. The policymaking process at times has entailed shutdowns (there were two short-lived shutdowns earlier in 2018) and debt limit brinkmanship.
Shutdowns are much less of a risk to sovereign creditworthiness than debt limit impasses. The partial nature of the current shutdown, affecting around 25% of the federal government, should limit its economic impact, although this will increase depending on its length.
Nevertheless, the ongoing shutdown suggests that the current arrangement of political forces, following November’s midterm elections that resulted in a divided Congress, limits policy consistency. It also makes it unlikely in the near term that medium-term fiscal challenges, such as rising mandatory spending will be addressed.
The main implication for our U.S. sovereign credit view will depend on whether we feel this shutdown foreshadows a more pronounced destabilization of fiscal policymaking, including brinkmanship over the debt limit, which happened in October 2013. The debt limit is due to come back into force in March, although the Treasury would have several months during which it could operate under extraordinary measures. We view the risk of a failure to lift the debt limit in time to prevent a U.S. federal debt default as remote. House Democrats’ adoption of a new version of the so-called Gephardt rule, linking debt limit suspension to the approval of budget resolutions, could make debt limit impasses less likely.
Evidence of greater dysfunction in fiscal policymaking could still contribute to negative pressure on the U.S. rating. This is especially the case as deficits continue to increase (pro-cyclical fiscal stimulus in 2018 helped widen the federal deficit in the fiscal year Sept. 30 by 17% to USD779 billion) at a time when growth is likely to slow.
Democratic control of the House reduces the prospect of additional, large tax cuts over the next two years, although spending consolidation is also unlikely. Policies enacted by the new Congress could influence U.S. fiscal outturns, although we expect relatively limited impacts on our deficit forecasts. These include plans to reintroduce the ‘PAYGO’ budget rule mandating that any changes to legislation affecting mandatory spending do not increase budget deficits. Democrats have also said they will amend the rule that requires a three-fifths majority in the House of Representatives to raise income taxes.
