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Implications for the economy as the US government faces imminent shutdown | Economy Update.


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Republican infighting has resulted in the failure of a stopgap measure in the US House of Representatives, which was intended to prevent a government shutdown on September 30. With hardline Republicans refusing to pass any legislation without drastic cuts to discretionary funding, the country now faces the possibility of a shutdown of all non-essential federal functions. Even essential functions won’t receive full pay until the shutdown is over. This political partisanship has elevated tensions and led to a potential crisis in government funding.

Without government funds, federal workers may go without pay, and citizens may lose access to programs such as nutrition assistance. The shutdown could also have a negative impact on the overall US economy, potentially worsening the country’s credit rating and driving up interest rates for government loans. Economists predict that a two- to four-week shutdown could result in a reduction of 0.1 to 0.4 percentage points in quarterly economic growth. The worst-case scenario of a full quarter shutdown could cause a 2 percentage point reduction in GDP growth. The shutdown would also have lasting effects on government contractors, small businesses, and the stock market.

Currently, the options to avoid a shutdown are limited. Congress must pass 12 appropriations bills to keep the government running, but it is unlikely to complete this process before the deadline. A stopgap measure could be used to temporarily fund the government while Congress continues to work on the appropriations bills, but hardline Republicans have rejected this option. House Democrats are looking to a potential bipartisan stopgap from the Senate, but it’s unclear if House Speaker Kevin McCarthy, a Republican, would introduce it on the House floor. The pressure on Republicans may lead to a shorter shutdown, but it also increases the risk of a more lengthy shutdown due to heightened intraparty tensions.

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