As previously reported on Conduit Street, the US government is barreling toward yet another government shutdown as Congress struggles to reach a consensus on a series of appropriations bills that fund government operations before the start of the new fiscal year on October 1.
Moody’s, a leading credit agency, warns that a possible federal government shutdown this week could tarnish the country’s credit rating and that the economic effects of a shutdown would be most heavily felt in industries and geographical areas with a high concentration of federal workers, such as Maryland.
US Credit Rating In Jeopardy
While the actual economic impact of a shutdown is likely to be primarily mitigated once the government reopens, the damage could be longer-lasting for other reasons, according to Moody’s.
“A shutdown would be credit negative” for the US debt” and “would underscore the weakness of US institutional and governance strength relative to other Aaa-rated sovereigns that we have highlighted in recent years,” Moody’s analysts wrote.
The credit rating firm added, “It would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability.”
While Moody’s did not change its AAA rating on US debt, the warning comes roughly two months after Fitch Ratings, another major credit ratings agency, downgraded US credit from the highest rating, citing an expected fiscal deterioration over the next three years, a growing general government debt burden, and eroding political stability. In that case, the firm lowered the nation’s rating to AA+ from its previous AAA level.
Fitch also cited general economic uncertainty, medium-term challenges related to rising social security and Medicare costs, the Federal Reserve’s rate tightening cycle, and a potential recession as other contributors to the rating downgrade.
While a lower credit rating could raise borrowing costs for the US government, the downgrade is unlikely to damage the country’s creditworthiness or reputation.
Maryland Is Particularly Vulnerable to A Government Shutdown
“Although federal workers will likely get back pay once the shutdown ends, as they have in previous government shutdowns, many low-wage private contractors, including food service workers and security guards, likely will not and face a permanent loss of income,” Moody’s, led by analyst William Foster, said in the report.
According to the Congressional Budget Office (CBO), the 2018-2019 shutdown reduced Gross Domestic Product (GDP) by $11 billion, including $3 billion that will never be recovered. In addition, a 2019 US Senate report found that the three government shutdowns in 2013, 2018, and 2019 cost taxpayers nearly $4 billion.
Maryland has a disproportionate number of federal employees and contractors because of its proximity to Washington, DC. Maryland is home to more than 150,000 federal employees, tens of thousands more federal contractors, and many Maryland businesses tied directly to providing services to those workers.
Under a shutdown scenario, most federal employees are told not to report for work as all but essential services are suspended. Federal workers are not paid while the government is shut down, even if they are working. And even though they will eventually get paid, many workers cannot afford to go without a paycheck.
As previously reported on Conduit Street, approximately 172,000 Marylanders affected by the 2018-2019 partial government shutdown missed out on an estimated $778 million in wages, resulting in $57.5 million less in state and local income tax withholding and $2.1 million less in sales tax collections. While furloughed federal workers received back pay once the shutdown ended, it’s unlikely that federal contractors could recoup lost wages.
In response, the Maryland General Assembly passed the Federal Shutdown Paycheck Protection Act, which provides no-interest loans to essential government employees who must report to work without pay.
What’s the holdup in Congress?
Every year, Congress must pass, and the President must sign, budget legislation for the next fiscal year — a series of bills that make up the discretionary spending budget, one from each Appropriations subcommittee. However, Congress has yet to enact any spending bills for fiscal 2024 as Democrats and Republicans struggle to reach a funding agreement.
The discretionary budget funds most federal departments. If Congress does not reach a spending agreement by September 30 — the end of the federal government’s fiscal year, these departments must close unless they have surplus funds.
Democratic and Republican lawmakers have acknowledged that there will not be enough time before the September 30 deadline for either chamber to pass all 12 appropriations bills. Instead, all hope lies in passing what’s known as a continuing resolution — a temporary spending bill that allows federal government operations to continue when final appropriations have not been approved by Congress and the President — to stave off another shutdown.
But House Republicans are struggling to whip votes in their fractured caucus and thus far have failed to clear the path for a vote on a potential temporary funding plan, which would give lawmakers time to strike a long-term appropriations deal. Even if House Republicans wrangle the votes necessary to pass a short-term spending plan, the measure would likely include a series of policy riders dead on arrival in the Democratic-controlled Senate.
And while a continuing resolution temporarily ensures that the government will remain open, it would signal that lawmakers are again unable to agree on a series of year-long spending bills before the ones from the previous year lapse at the end of September. According to the US Government Accountability Office, there have been 47 continuing resolutions between fiscal 2010 and 2022. These ranged from 1 to 176 days (just under six months).
Stay tuned to Conduit Street for more information.
Previous Conduit Street Coverage