What Happens During a Government Shutdown?
As talks on raising the U.S. debt ceiling stall, the United States could be heading for a government shutdown. What is a government shutdown? For starters, it doesn’t mean that the Capitol Building in Washington D.C. will close its doors to visitors. That might happen, of course, but it would only be a consequence.
A Trump government shutdown is certainly not what Republicans are hoping for. Fitch Ratings, Inc. has already announced that the U.S. would lose its “AAA” rating. This warning comes as negotiations have yet to begin between the White House and Congress over the debt ceiling and the 2018 budget. The fiscal year begins on October 1, 2017. Both issues must be resolved by then.
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But first, here’s the government shutdown explained in simple terms.
The United States government would shut down all its non-essential services—probably at one minute after midnight on October 1 (the fiscal deadline)—which would imply that the government has failed to deliver the necessary fiscal decisions to authorize “non-essential” services. That might not sound so bad, but the picture becomes a little worse because it means there would be no money other than for police, fire, air traffic control, and the like.
Also Read: How a Government Shutdown Could Trigger Stock Market Crash 2017
So, the question is: “Will Trump shut down the government?” He is probably not keen on reaching this dubious goal. But the challenges to avoid a shutdown are severe. And so are the consequences. Fitch—and probably its counterparts, Standard & Poor’s Financial Services LLC (S&P) or Moody’s Corporation (NYSE:MCO)—would lower the United States’ sovereign rating. That’s because, with no budget, the government would be unable to prioritize debt service payments in relation to other financial obligations.
Indeed, if it comes down to a debt ceiling crisis, a government shutdown would prevent Congress from agreeing to raise it. The country would be unable to pay back its lenders and would find it more expensive to borrow. A government shutdown would also show the world that the U.S. is experiencing an unusual political divide. This would weaken the world’s perception of the American economy and the financial markets.
Meanwhile, Trump seems ready to play Russian roulette with the shutdown. He has revived his plans for “The Wall” with Mexico, promising to force it through Congress with or without the backing of Democrats. Trump said he would build the $1.6-billion wall even if it’s necessary to shut down the government. But the U.S. president must also face strong opposition coming from his own Republican ranks. Rather than spending money on border walls with Mexico, congressional Republicans want to push through budgetary matters to help the president. They will demand measures to aggressively reduce the budget deficit in exchange for support to raise the debt ceiling. But the Republican base will likely object to this course of action. (Source: “GOP clash looms over raising the debt ceiling,” Politico, August 3, 2017.)
While it’s true that Republicans control Congress and the presidency, divisions within the party undermine Trump. That means, if Trump raises the debt ceiling, he will compromise his tax reform plans. The fact that Trump has already faced so many obstacles in repealing and replacing Obamacare demonstrates the risk that the president could end up with, having achieved a mere skeleton of his agenda.
Investors are viewing the prospect of a shutdown with fear. The repercussions will be felt far beyond the walls of the Capitol. Republicans need a legislative victory of some kind. Otherwise they risk losing everything in the mid-term elections of 2018. That would formally paralyze Trump, who has already faced difficulty navigating D.C. politics and getting things done. The smallest doubt about Trump’s ability to deliver his tax reform will add a cold dose of reality to the markets.
