“The economic impact of the US government shutdown depends on the duration for which government services remain suspended, and whether President Trump permanently cuts essential and productive jobs.”
- The partisan conflict in the US led to a government shutdown due to spending disagreements. This is not unprecedented.
- The shutdown is not due to a breach of the US debt ceiling which, in theory, could lead to a default. The US has never defaulted on its debt.
- Nonetheless, this situation could create volatility and affect investor confidence. For the time being, markets are ignoring this.
The US government shut down on 1 October, following disagreements between Republicans and Democrats over healthcare-related spending. In particular, the Democrats are demanding an extension of the premium subsidies provided under the Affordable Care Act, which are due to expire by year-end. The last shutdown occurred in 2018-19 and was also the longest, as illustrated in the chart. Essential government services will continue to operate. The primary concerns relate to federal employees who may be furloughed, the consequent loss of income, and the broader economic costs, given the suspension of non-essential services. Once the government reopens, furloughed employees, as well as those who worked without pay, are likely to receive their salaries retroactively. Therefore, while some economic activity will be recovered, it will not be fully restored. The overall impact depends on the duration of the government closure.
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