The prospect of a government shutdown and another unnecessary standoff in Congress over raising the nation’s debt ceiling are providing a lump of coal in Americans’ holiday stockings.
Government shutdowns and debt ceiling standoffs come with real risks, including a downgrade in the U.S. credit rating and higher yields.
At issue are a $110 billion disaster relief bill, an extension of the farm bill and a two-year proposed suspension of the debt ceiling until January 2027. With Congress unable to reach agreement as of late Thursday, the government is heading for a shutdown early Saturday.
Still, despite the escalating rhetoric, it would appear that an agreement is more likely in the near term than a 35-day standoff similar to what happened at the end of 2018.
Periodic government shutdowns and debt ceiling standoffs have become somewhat routine–but they come with real risks. Those risks include a downgrade in the U.S. credit rating and higher yields across the U.S. Treasury curve .
And that kind of damage would be entirely self-inflicted—the result of a lack of fiscal discipline and political will rather than any inability to meet debt payments.
Economic populism
If an agreement is reached, it could set the stage for another round of deficit-fueled tax cuts and government spending, which would push up yields on longer-term rates. Those rates stand at 4.56%, a sign that markets doubt lawmakers will embrace the rigors of fiscal discipline.
Perhaps more interesting is that President-elect Donald Trump stated that he thought the debt ceiling—last frozen at $31.38 trillion in 2023—should be done away with. Democrats have long called for such a move while Republicans have traditionally used the debt ceiling as negotiating leverage.
Financial market participants support the elimination of the debt ceiling and the market turmoil that often accompanies these standoffs.
Read more of RSM’s insights on the economy and the middle market.
It’s all part of the strange logic of economic populism, which under the new administration means lower taxes and higher government spending, paid for by deficits.
While annual fiscal operating deficits of around 6.5% of gross domestic product are not sustainable and must be reduced to 3% or lower, it is equally clear that neither of the major political parties is serious about addressing the issue.
In this new policy era, the logic of economic populism will produce strange policy bedfellows and a new political economy.
