Less than two months after the U.S. Congress passed a temporary spending bill and the resignation of former House Speaker McCarthy, the federal government is once again on the brink of a shutdown.
The temporary spending bill passed by Congress on September 30 will expire on November 18. To avoid a federal government shutdown due to depleted funds, Congress needs to agree on a new spending plan by midnight this Friday, local time.
Avoiding a federal government shutdown is the first major challenge facing the new House Speaker, Republican Johnson. Johnson, 51, who entered Congress in 2016, was chosen as Speaker partly because he is relatively new and has not yet made significant enemies.
Although a far-right conservative, Johnson, as House Speaker, must consider the needs of various factions within the Republican Party and the Democratic Party, which controls the Senate.
Last weekend, Johnson proposed a temporary spending bill to prevent a government shutdown. However, like his predecessor McCarthy, Johnson's plan faced opposition from the far-right conservatives within the Republican Party, with at least seven Republicans indicating they would vote against it.
This means that to pass the temporary spending bill before midnight on Friday, Johnson needs the support of Democrats. McCarthy lost his position as Speaker because he relied on Democrats to pass the spending bill vote.
As the U.S. Congress is on the verge of chaos again, international credit rating agency Moody's downgraded the outlook for the U.S. sovereign credit rating from "stable" to "negative."
Johnson's Test
Johnson's plan, announced last Saturday, is not for the entire 2024 fiscal year but a temporary measure to delay a federal government shutdown, allowing more time for discussion on the 2024 fiscal year spending plan.
Johnson's plan is a two-step "Continuing Resolution." A Continuing Resolution is a temporary spending bill that allows the federal government to maintain operations temporarily when a new fiscal year spending bill has not been passed by Congress. The funding level of a Continuing Resolution generally remains the same as the previous fiscal year and can last from a few days to five months.
The first bill would extend federal government funding for military construction, veterans' benefits, transportation, housing, urban development, agriculture, the Food and Drug Administration, energy, and water resources departments until January 19 next year. The second bill would extend funding for the rest of the federal government, including defense, until February 2 next year.
Neither of these bills involves U.S. aid to Israel and Ukraine, nor do they require the Biden administration to make significant spending cuts. Previously, Biden had requested Congress approve $100 billion in aid, involving Ukraine and Israel.
Johnson said his two-step Continuing Resolution would allow House Republicans to continue fighting for a "conservative victory."
However, the plan was immediately opposed by the far-right wing of the Republican Party. Texas Representative and House Rules Committee member Roy was the first to speak out, criticizing the plan for not reflecting conservative demands for significant government spending cuts.
In addition to Roy, at least seven Republicans, including the chairman of the far-right "Freedom Caucus" Perry and Trump supporter Greene, also explicitly opposed Johnson's plan.
The far-right conservatives, represented by the "Freedom Caucus," demand that the federal government's discretionary spending for the new fiscal year be reduced to $1.47 trillion, the level of the 2022 fiscal year. However, the agreement reached this summer between then-Speaker McCarthy and Biden set the 2024 fiscal year spending limit at $1.59 trillion.
With 221 Republican seats and 212 Democratic seats in the House, a spending bill requires the support of more than half of the members, at least 218 Republicans, to pass if Democrats collectively oppose it. Based on the current number of opponents to Johnson's proposal, Republicans alone cannot pass the temporary spending bill.
This means that, like McCarthy, Johnson needs the support of Democrats to pass the bill before midnight on Friday.
In the Democrat-controlled Senate, Majority Leader Schumer has already extended an olive branch. Schumer did not explicitly support Johnson's proposal, but he also said that although Johnson's proposal is not perfect, the most important thing is that it does not require significant government spending cuts.
House Democrats are dissatisfied that the plan does not include aid to Ukraine and Israel, but considering that the plan does not require government spending cuts, House Democratic Leader Jeffries said he would carefully evaluate Johnson's proposal.
In the vote on the temporary spending bill on September 30, the House passed the bill with 335 votes in favor and 91 against. However, 211 of the votes in favor were from Democrats, and as many as 90 Republicans voted against it. McCarthy relied entirely on Democratic votes to pass the spending bill. Like Johnson's proposal, McCarthy's proposal also did not require significant spending cuts by the Biden administration.
McCarthy paid the price for this, losing his position as Speaker of the House. If Johnson ultimately relies on Democrats to pass the temporary spending bill, he may face the same fate as McCarthy.
However, unlike McCarthy, Johnson is a far-right figure and a staunch Trump supporter, having supported Trump in denying the results of the 2020 election. When he was elected Speaker of the House, several far-right Republican members said they would be more tolerant of Johnson.
The House will discuss Johnson's plan on Tuesday, local time.
Moody's Downgrades U.S. Rating Outlook
As early as September, Moody's sounded the alarm for the United States , warning that a federal government shutdown on October 1 could negatively impact the U.S. credit rating. Moody's noted that while a government shutdown would not disrupt the U.S. economy in the short term, it would expose weaknesses in U.S. governance capabilities.
In its warning, Moody's specifically mentioned the political polarization in the U.S., stating that a government shutdown would demonstrate how increased political polarization poses a "serious constraint" on the formulation of U.S. fiscal policy.
Last Friday, a day before Johnson's temporary spending plan was announced, Moody's declared a downgrade of the U.S. sovereign credit rating outlook from "stable" to "negative." In explaining the downgrade, Moody's again cited political polarization.
Moody's pointed out that the "continual" political polarization in the U.S. Congress increases risks, suggesting that future U.S. governments may struggle to timely formulate fiscal plans and mitigate the country's debt burden.
The agency noted the current rise in U.S. interest rates and the government's lack of effective policy measures to cut spending or increase revenue. In this context, the U.S. is facing a substantial fiscal deficit, "severely weakening" the country's debt-bearing capacity.
Among the three major international rating agencies, Moody's is the only one still maintaining the highest rating for the U.S. The question of whether Moody's will downgrade the U.S. rating in the future has become a focal point of attention.
In August this year, Fitch downgraded the U.S.'s long-term foreign currency issuer default rating (IDR) from "AAA" to "AA+." Two days after the Obama administration and Republicans reached a last-minute agreement on the debt ceiling in 2011, Standard & Poor's downgraded the U.S.'s sovereign credit rating from "AAA" to "AA+."
Affected by Moody's downgrade, the U.S. stock market opened lower on November 13, with the Dow Jones falling 0.12%, the Nasdaq falling 0.38%, and the S&P 500 index falling 0.26%. At the close, the three major stock indices were mixed, with the Dow Jones up 0.16%, the S&P 500 index down 0.08%, and the Nasdaq down 0.22%.
If Republicans and Democrats cannot agree on a temporary spending bill by midnight on Friday, the federal government will shut down on Saturday.
In such an event, non-essential services like national parks and museums will close, some government employees will be forced to take unpaid leave, and most essential positions, including soldiers and air traffic controllers, will work without pay.
Since 1976, the U.S. federal government has experienced 20 shutdowns. The last shutdown was in December 2018 during Trump's administration, lasting 35 days, the longest in U.S. history.
A September report by Goldman Sachs suggested that a federal government shutdown would have limited impact on the U.S. economy. Unlike the debt ceiling issue, a government shutdown is more controllable from a macroeconomic perspective. After a shutdown, about 65% of federal government employees, considered essential, would continue to work. Market investments and the purchase of goods and services would not be affected.
During the three prolonged shutdowns since 1990, the U.S. stock market did not show significant changes, even rising and then falling at times. However, the report also warned that because the impact of a federal government shutdown on the economy is less severe than a debt ceiling impasse, Congress might be less prompt in taking action.
