June 18, 2024

A shutdown is possible if Congress fails to provide funding for the fiscal year starting October 1.

A US government shutdown would negatively affect the country’s credit, credit rating agency Moody’s has warned, one month after Fitch downgraded the United States by one notch on the back of a debt ceiling crisis.

US government services would be disrupted and hundreds of thousands of federal workers furloughed without pay if Congress fails to provide funding for the fiscal year starting October 1.

A possible shutdown would be further evidence of how political polarisation in Washington, DC is weakening fiscal policymaking at a time of rising pressures on US government debt affordability because of higher interest rates, Moody’s analyst William Foster told Reuters on Monday.

“If there is not an effective fiscal policy response to try to offset those pressures … then the likelihood of that having an increasingly negative impact on the credit profile will be there,” said Foster. “And that could lead to a negative outlook, potentially a downgrade at some point, if those pressures aren’t addressed.”

Moody’s has an “Aaa” rating for the US government with a stable outlook – the highest creditworthiness it assigns to borrowers. It is the last major agency with such a rating after Fitch downgraded the US government triple-A rating by one notch in August to AA+ – the same rating assigned by S&P Global in 2011.

A lower credit rating means the US may seem less creditworthy and may have to pay higher interest rates on its debt.

US fiscal policy ‘less robust’

“Fiscal policymaking is less robust in the US than in many Aaa-rated peers and another shutdown would be further evidence of this weakness,” Moody’s said in a statement.

The economic impact of a shutdown would likely be limited and short-lived, with the most direct economic impact caused by lower government spending. Of course, the longer the shutdown lasts, the more negative its impact would be on the broader economy, said Moody’s.

US Agriculture Secretary Tom Vilsack warned on Monday that a government shutdown risks nutritional assistance for the nearly 7 million low-income women and children who rely on benefits.

Vilsack said some benefits could be affected within days or weeks if Congress fails to provide funding for the fiscal year starting Sunday.

Congress so far has failed to pass any spending bills to fund federal agency programs in the fiscal year starting on October 1 amid a Republican Party feud.

The shutdown would not affect government debt payments but it would come just a few months after political brinkmanship around the US debt limit threatened to cause a US sovereign debt default.

That crisis, even though it was eventually resolved before any missed debt payment, was a major factor leading Fitch to downgrade its US rating by one notch last month.

“In this environment of higher rates for longer and pressures building on the debt affordability front, it’s that much more important that fiscal policy can respond,” said Foster at Moody’s.

“And it looks increasingly challenged because of things like the government shutdown and having come off the debt limit episode, because it’s such a polarised political dynamic in Washington.”

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