Investing.com - Experts continue to weigh in after Fitch downgraded the US long-term debt rating last week. Libby Cantrill, managing director of US public policy at PIMCO, discusses the situation:
What's happening?
"In recent weeks, our view has been that a US government shutdown in October seemed more likely than not. Ironically, Fitch's downgrade of US credit ratings from AAA to AA+ increases the chances of a government shutdown this autumn. This is because the downgrade is likely to toughen the views of House Republicans, who are demanding more significant spending cuts than those agreed in the bipartisan debt limit bill. Of course, a government shutdown would be ironic, as part of the reason for Fitch's downgrade was political clashes, such as government shutdowns," Cantrill explains.
"While a government shutdown has short-term economic fallout, it tends to be short-lived and is reversed when the government reopens. That said, a government shutdown could coincide with a noisy downturn from an economic perspective and could potentially exacerbate an economically uncertain period, which will see the resumption of student loan payments for some 45 million student borrowers, as well as a federal tax bill for many taxpayers who have not had to pay 2023 taxes due to living in emergency disaster zones. We are also likely to see the practical impact of regional bank credit tightening, in addition to a data-dependent Fed," she adds.
For Cantrill, "even if the government were to shut down and House Republicans were able to secure the cuts they want, this would do little to change the fiscal trajectory, as to do so, welfare programmes (which accounted for 66% of the budget last year) would have to be reformed, which is currently not a possibility".
Conclusion
"Upon their return in September, the House and Senate have 12 legislative days to pass 11 appropriations bills. While the Senate is in better shape, having passed nearly all 12 appropriations bills out of committee (and nearly all of them unanimously), there simply won't be time to reconcile the differences between what the House passes and the Senate bills," the PIMCO expert explains.
"Normally, a 'continuing resolution' would be used as a stopgap measure to fund the government at current levels and buy more time. However, House Republicans, especially the Freedom Caucus, are unlikely to support such a measure, as they see more political opportunities in advocating fiscal restraint and a possible government shutdown. However, if a shutdown were to occur, we believe it would likely end on 1 January, which is the actual deadline for funding the government. If the 'regular' appropriations bills have not been passed by then, an across-the-board 1% cut would go into effect as part of the debt ceiling deal," he concludes.
(Translated from Spanish using DeepL)