Unhappy New Year!

US Government Shutdown Looms
 

With neither full-year appropriations bills nor a continuing resolution (CR) providing temporary funding in place, it’s quite possible the US government will at least partially shut down when the federal fiscal calendar flips to 2026 at midnight tomorrow.

The lack of progress on regular appropriations this late in the game is not unusual; Congress has passed the 12 funding bills before the start of the fiscal year only three times since 1977, most recently for 1997.¹ To avoid the disruption that would accompany the necessary shuttering of federal agencies once funding lapses, Congress has long relied on temporary spending bills known as continuing resolutions to provide interim budget authority. Fiscal 2025 was funded by three consecutive CRs, for example, while fiscal 2024 needed four. (Note that a government shutdown does not impact mandatory spending that falls outside the appropriations process, like Social Security payments and sovereign debt service.)

Not surprising given the polarized nature of today’s government, enacting a CR is proving no easier than the regular appropriations process. On September 19, the House of Representatives passed a Republican-backed continuing resolution through November 21—largely on party lines—though the bill was defeated in the Senate later that day. While Republicans are pushing a “clean” stopgap bill, Democrat lawmakers seek to tie any CR to a reversal of recent spending cuts to Medicaid and an extension of certain soon-to-expire subsidies under the Affordable Care Act.² Subsequently, the White House has instructed federal agencies not only to prepare for a shutdown, but also to “use this opportunity to consider Reduction in Force” notices to lay off federal employees.

Government shutdowns have not been uncommon—there have been 20 “funding gaps” since the introduction of the modern budget process in fiscal 1977—and they historically have had little impact on the trajectory of asset prices or economic growth.³ Given the elevated fiscal and political risks currently facing the US, however, it remains to be seen if this latest show of political brinksmanship is greeted by markets with something beyond the usual collective shrug.