By Dr Wissam Fattouh, Secretary General, Union of Arab Banks and World Union of Arab Bankers
Government shutdowns are not unique to the United States but are more common in the United States due to its political structure, government funding process and legislations and rising tensions between different parties on priorities of government funding.
This study overviews government shutdowns in the United States. This overview covers the reasons behind government shutdowns in general and the specific reasons behind October 2023 shutdown. The latter was avoided on 30 September 2023. The wider impact of the US government shutdown is analysed including the impact on banks.
The study concludes with a call to Arab countries to resolve their government budget and funding issues in order to avoid government shutdowns. Arab banks are also advised to put their own strategies to avoid the risks of government shutdowns and to deal with the consequences of government shutdowns on banks and stock exchanges and on various economic sectors.
What Is US Government Shutdown?
A United States (US) government shutdown occurs when nonessential US government offices can no longer remain open due to a lack of funding. The lack of funding usually occurs when the Congress fails to enact the annual appropriation bills or a temporary funding measure to finance the government for the upcoming fiscal year. The shutdown remains in effect until funding legislation is passed. A shutdown can be full or partial, depending on how many agencies are affected.
How US Government Fund Its Agencies
The US government funds its agencies through a process called the federal budget process. The process begins a year before the budget is to go into effect. Federal agencies create budget requests and submit them to the White House Office of Management and Budget (OMB). OMB refers to the agencies’ requests as it develops the budget proposal for the president. The president submits the budget proposal to Congress early the next year. Proposed funding is divided among 12 subcommittees, which hold hearings. Each is responsible for funding for different government functions such as defence spending or energy and water. The House and Senate create their own budget resolutions, which must be negotiated and merged. Both houses must pass a single version of each funding bill. Congress sends the approved funding bills to the president to sign or veto.
The annual budget covers three spending areas: mandatory spending, discretionary spending, and interest on the debt. Mandatory spending includes funding for Social Security, Medicare, veterans benefits, and other spending required by law. This typically uses over half of all funding. Discretionary spending includes federal agency funding. Congress sets funding levels for these each year. This usually accounts for around a third of all funding. Interest on the debt usually uses less than 10 percent of all funding.
Resolving a Government Shut Down
In the United States, the government shutdown can be resolved by passing a new funding legislation that is signed into law by the President. Congress can pass a stopgap funding measure to keep the government open temporarily until a long-term funding bill is passed. In addition, lawmakers can also pass a bill that would prevent future government shutdowns by triggering two-week stopgap bills and requiring Congress to focus solely on spending bills if Congress misses its September 30 funding deadline.
Impact of US Government Shutdown
The impact of a government shutdown can vary and can depend on the duration of the shutdown and the specific agencies affected.
The impact of a US government shutdown can be far-reaching and can affect many Americans, including federal employees, Social Security recipients, air travelers, and those who rely on national parks.
Federal employees and active-duty troops would feel the effect immediately if their agencies are not funded. Essential workers would remain on the job, but others would be made redundant until the shutdown is over. None would be paid during the shutdown. Social Security recipients may also face delays in receiving their checks and services. Air travel could be affected, as Transportation Security Administration (TSA) agents and air traffic controllers may not receive their paychecks on time. National parks may also close or operate with limited services.
The economic impact of a government shutdown can also be significant. A shutdown could weigh on economic growth, dragging down year-over-year quarterly Gross Domestic Product (GDP) by 0.2 percentage points per each week of the shutdown. Companies with considerable exposure to government spending could see a negative impact as well.
Past US Government Shutdowns
As of September 2023, there have been ten government shutdowns in the United States. The first shutdown occurred in November 1981, when President Ronald Reagan vetoed a funding bill. The most recent shutdown occurred in January 2018 and lasted for three days. The longest shutdown in US history was from December 22, 2018, to January 25, 2019, during the Donald Trump administration.
US Government Shutdown In 2023
There was a possibility of a government shutdown in October 2023. The Republicans halted the spending bill for a third time, and if a consensus was not achieved regarding the budgets, the federal government would have gone into a total shutdown starting October 1, 2023. However, the US Congress passed a stopgap bill to avert the shutdown. The Senate passed a last-minute spending bill on Saturday 29 September 2023 at night averting a government shutdown that would have triggered a calamitous domino effect on the American public and economy. The measure was signed into law by President Joe Biden.
Reason Behind 2023 US Shutdown
The US federal system of government allows different branches of government to be controlled by different parties. This structure was devised by the nation’s founders to encourage compromise and deliberation, but lately has had the opposite effect. That is because in 1980, the Attorney General under President Jimmy Carter’s administration issued a narrow interpretation of the 1884 Anti-Deficiency Act. The 19th Century spending law banned the government from entering into contracts without congressional approval. For almost a century, if there was a gap in budgets, the government allowed necessary spending to continue. But after 1980, the government took a much stricter view “no budget, no spending”. That interpretation has set the US apart from other non-parliamentary democracies, such as Brazil, where a strong executive branch has the ability to keep the lights on during a budget impasse.
The US was on the brink of a federal government shutdown after hard-right Republicans in Congress rejected a longshot effort to keep offices open. The move comes as they fight for steep spending cuts and strict border security measures that Democrats and the White House say are too extreme.
Even though the House bill has already included routine Ukraine aid, an intensifying Republican resistance to the war effort means the Senate’s plan to attach $6 billion to support Ukraine in war with Russia, may have bipartisan support from Democrats but not from most of McCarthy’s Republicans. Republican Senator Rand Paul of Kentucky is working to stop the Ukraine funds in the Senate package entirely.
Impact on Every Economic Sector
A government shutdown can have a significant impact on the economy and every economic sector. During a shutdown, many government operations come to a halt, resulting in a full or partial shutdown until Congress acts. The following are some of the potential impacts of a government shutdown on the economy:
- Consumer spending: During a shutdown, federal employees may not receive their paychecks, which can lead to a decrease in consumer spending.
- Loan defaults: A decrease in consumer spending can lead to a rise in loan defaults, which can affect the overall economy and, in turn, the banking industry.
- Stock market: A government shutdown can cause uncertainty in the stock market and lead to a decline in stock prices.
- Small businesses: Small businesses that rely on government contracts may be affected by a shutdown if they are unable to receive payments from the government.
- Tourism: National parks and museums may close during a shutdown, which can affect tourism and related industries.
- Housing market: A shutdown can delay mortgage approvals and closings, which can affect the housing market.
The Wider Impact
The US government shutdown can have a negative impact on the country’s credit, according to Moody’s. The shutdown could also cost the country’s travel economy as much as $140 million per day. However, economists from Goldman Sachs expect the shutdown to have no harm on US gross domestic product.
A shutdown affects nearly every corner of the US government, from the delivery of welfare cheques and publishing of national economic data to the operation of federal courts, museums and national parks.
Government Shutdowns around the World
Shutdowns are usually a result of political disagreements and can happen in any country where there is a democratic system. Shutdowns can have a significant impact on the economy and people’s lives, so it is important for governments to work together to avoid them.
Government shutdowns are not unique to the US, but they are less common in other countries. In other countries, governments keep functioning even in the midst of wars and constitutional crises. For most of the world, a government shutdown is very bad news and it may be the result of revolution, invasion or disaster.
During COVID-19 pandemic countries around the world have responded in different ways and various types of shutdowns where imposed.
Risk on Banks
The impact of a government shutdown on banks is not direct. However, it can have an indirect impact on banks and their customers. During a government shutdown, public sector employees may not receive their paychecks, which can lead to a decrease in consumer spending and a rise in loan defaults. This can affect the overall economy and, in turn, the banking industry. Banks should put their own policies and procedures during a shutdown.
Prevention of Government Shutdowns
The prevention of a government shutdown is a complex process that involves negotiations between the executive and legislative branches of the government. The best way to prevent a shutdown is to pass a budget or a continuing resolution (CR) before the deadline. A budget is a comprehensive spending plan that outlines how the government will allocate its resources for the fiscal year. A CR, on the other hand, is a temporary measure that allows the government to continue operating at current funding levels until a budget is passed.
In addition to passing a budget or CR, there are other measures that can be taken to prevent a shutdown. For example, lawmakers can work to resolve any contentious issues that may be holding up the budget process. They can also work to find common ground on issues such as immigration, healthcare, and national security.
It is important to note that preventing a government shutdown requires cooperation and compromise from both political parties. If lawmakers are unable to reach an agreement before the deadline, then a shutdown may occur.
Authorities in Arab countries should collaborate to prevent government shutdowns. Arab banks should put their own strategies and roadmap to address the challenges and risks of government shutdowns that occurs locally or in other countries around the world. Moreover, advanced tools and technologies should be developed to enhance economic and financial vision and detect potential reasons for future government shutdowns in order to prevent future shutdowns and reduce their harmful impact.
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