The US government has avoided a shutdown, but changing the fiscal trajectory requires tackling a sizable budget deficit, so fiscal policy should remain a friction point for the economy and markets.
The US Congress agreed on a short-term funding measure as September came to a close, heading off a government shutdown. The bill keeps the government running until November 17—just over a month from now—and ends the uncertainty that swirled as the debate raged. So, the shutdown has been avoided—for now—but it remains a possibility again when the stopgap measure expires.
A Spending Stopgap, but Fiscal Issues Run Deeper
However, more important than any short-term shutdown, in our view, is that a major change in the political climate would be required in order to address the US government’s long-term fiscal trajectory. Because that change seems unlikely, we expect fiscal policy to remain a friction point for the US economy and financial markets.
Make no mistake: avoiding a government shutdown is good news, because they cause hardship for many households, impede economic growth and rattle investors’ nerves. However, fiscal issues in the US run much deeper than a temporary shutdown. Budget deficits have remained unusually large in the post-COVID era, which is a break from the typical pattern. Usually, governments run large deficits during recessions and tighten fiscal policy during expansions.
A Surprising Problem with Declining Revenues
It's interesting that the deterioration in the budget deficit has more to do with government revenues than it does with government spending (Display). Yes, spending is up, but the real surprise is that government revenues are down, which doesn’t usually happen during an economic expansion.