The Government Shut Down – Now What?

Economy

The Government Shut Down – Now What?

Ed Mills, Washington Policy Analyst, dissects key areas of congressional disagreement and likely next steps.

January 22, 2018

We continue to expect minimal market impact from the government shutdown, but are uncertain exactly how long it will last. Resolution on immigration/border security concerns remains the key issue to reopening the government, but the current negotiating positions in this debate have made compromise difficult. Much of the current discussion on timing is focused on a short-term funding bill that would reopen the government, push any subsequent date beyond the State of the Union Address (scheduled for January 30) and give time for an immigration/border security bill to be finalized. Should the shutdown continue for more than a few days, we would expect some concern related to the potential delay in the implementation of the tax bill/workers seeing the adjustments in their paychecks. Longer-term attention will move towards the need to lift the debt ceiling. The Treasury has been using extraordinary measures since December, but congressional action is needed by March. The goal has been to include a debt limit solution in any final funding deal, but any additional short-term extensions or threats of shutdowns could draw market attention back towards debt ceiling fights.

Government Shutdown

Lacking the 60-votes necessary to clear a government funding bill, funding for discretionary federal government spending expired at midnight Friday. Our experience with past shutdowns suggests only a modest market reaction. We only would expect a market reaction if the shutdown becomes a proxy or foreshadows another market-moving event – such as a potential breach of the debt limit. The Trump administration has argued that this is “government shutdown light” as national parks and certain other government facilities that had been closed in previous shutdowns will remain open. Federal government employees that are deemed non-essential will be furloughed and are forbidden from working. The national security apparatus, most of the court system, TSA, and the post office all remain open during a shutdown.

Key Areas of Disagreement

The key to a resolution is a deal on the immigration/border security debate. The opposition to the current spending bill comes from concern that Congress will not vote on a fix to the Deferred Action for Childhood Arrivals (DACA) executive order. Immigration politics and disagreements over the potential building of a wall on the U.S.-Mexican border are polarizing debates. There have been reports that a bipartisan agreement has been reached in the Senate related to both the immigration and border security debate, but negotiations with the House of Representatives and President Trump have yet reached an agreement. Nothing this controversial has been solved on a bipartisan basis as of yet during the Trump presidency, making compromise even more difficult.

State of the Union

President Trump is scheduled to deliver his State of the Union Address next Tuesday, January 30. This address provides a potential deadline for negotiators to strike a deal and reopen the government. The State of the Union is traditionally one of the best opportunities a president has to outline his agenda. Should it occur during a shutdown, it could overshadow its intended message. The president will likely want to use the address to discuss the recently passed tax bill and outline his plans for infrastructure spending, trade, and national security policies.

Going Nuclear (Senate Style)?

The current Senate rules require the support of 60 (out of 100) Senators to advance a bill to fund the government. In recent years, the Senate has changed its rules to lower the threshold on clearing nominees from 60 to 51. These Senate rule changes only require a majority vote in the Senate and are referred to as “the nuclear option.” This latest round of spending fights prompted the president to call for a Senate rule change that would lower the threshold to 51 votes to pass spending bills. Over time this is the direction the Senate is headed, but we do not expect support in the Senate anytime in the near future. These changes dilute the power of individual senators and it is unlikely the current Senate makeup would support such a change.

Debt Limit

The U.S. Treasury has been using extraordinary measures since December to prevent a breach in the debt limit of the United States. It is estimated that the Treasury has until March until Congress will have to act to prevent a breach. Should the government shutdown fight linger or a series of additional short-term funding bills continue, we will become more concerned about the ability to prevent a breach.

Other Issues

Agreement on overall budget caps, disaster aid, extension of a variety of expired tax provisions, and the extension of the Children’s Health Insurance Program (CHIP) all remain on the to-do list in DC outside of the shutdown. It appears that most, if not all of these issues can be resolved in any final package, but the next few days will be critical to determining the scope of these efforts.

Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events.



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