Economic Implications: Understanding the US Government Shutdown’s Impact on the Economy

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Republican infighting in the US House of Representatives has led to the failure of a stopgap measure designed to prevent a government shutdown. The deadline to approve new budget legislation to fund the government for the next fiscal year is 30 September, and without an agreement, all federal functions deemed non-essential could be shut down. This could leave federal workers without pay and citizens without access to important programmes. The economy as a whole could also suffer, with potential losses of 0.1 to 0.2 percentage points of quarterly economic growth for every week the shutdown persists.
A quarter of the US gross domestic product comes from government expenditure, so any severe cuts in spending would have a significant impact on investments and consumption, affecting the economy as a whole. Economists predict that a four-week shutdown could lead to a 0.4 percentage point reduction in GDP. Furthermore, a long shutdown would result in permanent loss of hours and wages from government contractor employees, fewer small business loans, and slowed down stock market listings. If the shutdown lasts until January 1, there will also be an automatic one-percent cut in discretionary spending. At present, Congress must pass 12 appropriations bills to keep the government running each year, but with time running out, a stopgap measure is unlikely to be passed. House Democrats are hoping for a bipartisan stopgap that could potentially come from the Senate, but it remains unclear whether this will happen.

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